Investment Tips for Xinjiang, Urumqi and Kashgar

August 16, 2010 Posted by Chris Devonshire-Ellis Reading Time: 13 minutes

Aug. 16 – Xinjiang has been generating a fair amount of publicity recently as a potential destination for investment, driven by a variety of elements. Although the autonomous region in China’s far west suffered ethnic violence and unrest last year, things have been moving on. The impact of the uprisings of local Uighurs battling the often heavy-handed Chinese presence, resulting in deaths and injuries in the capital Urumqi, and Kashgar, the ancient Silk Road trading city close to the border with Pakistan, is now being eroded by Beijing’s attention to the region being refocused. China has since pledged billions of dollars of investment into the region, and the exoticism of Xinjiang – this is Central Asia after all – adds spice to the media mix.

The Chinese government is keen to get Xinjiang back on track and have been promoting domestic tourism to the region. As a result, internal flights to the capital have nearly doubled in the past 12 months and the government is keen to attract investment into the area. In doing so, tax incentives are being introduced and the status of several cities are set to change in order to attract more investment. Good publicity, especially the sort driven by financial opportunity, helps, and the Chinese media have been quick to seize opportunity to paint a brighter picture. That has been backed up by real effort; a total remake of Kashgar has been going on, with the city hopeful of obtaining special economic zone status of the sort that helped make Shenzhen so successful. Property prices for still yet to be developed apartments in Kashgar are going through the roof. So what is really going on and what are the opportunities for the foreign investor in Xinjiang?

Xinjiang has always held appeal, mainly of the romantic Silk Road sort, and I’ve been visiting on a regular basis for the past 15 years. However, as potential goes for developing it as a Central Asian hub, opportunities, albeit with some caveats, do exist. In fact two years ago I commissioned a report into the feasibility of my firm establishing a presence in Urumqi. However, the timing was poor; first the global financial crisis was arriving, then the riots. That the decision to consequently delay any immediate establishment in the region was probably a good thing in hindsight as it allowed me to concentrate more on our development in India, but the report was useful and the time is now ripe to evaluate Urumqi’s potential again. In this article I’ll share what I know about the region, its opportunities, problems, and what I learned from the report I commissioned about operating there.

Xinjiang itself is huge – it is the largest administrative region of China, covering some 1.6 million square kilometers. To the north lies Russia, to the south is Tibet and the Himalayas, and to the west, Kazakhstan. Add to that mix borders with Kyrgyzstan, Tajikistan, Afghanistan, Pakistan, India and Mongolia, and the reader can appreciate the ethnic and religious diversity. That alone has created tensions over the two and a half thousand years of recorded history in Xinjiang, not least the famous “Great Game” played out between Britain and Russia. Empires have fallen over Xinjiang, and the area for centuries has had a reputation for warlords, banditry and was always considered dangerous to travel. Nonetheless, Marco Polo traveled through here, as did the Chinese Monk Xuanzang, who gives us the Chinese literary classic “Journey to the West” from his exploits. Chingghis Khan sacked several cities here on his rampage through Central Asia, while parts of Xinjiang were briefly declared as Islamic emirate between the two world wars. More recently, Peter Fleming’s 1936 account in “News From Tartary” of a horse journey from Peking to Gilgit (now Pakistan) takes the reader across much of Xinjiang and remains essential descriptive reading. In truth, it has only been through the Chinese claims on the land and its strict ongoing administration of them since the creation of the autonomous region in 1955 that has brought any prospect of sustainable peace to a charismatic, yet volatile part of the world. Yet this land is very much part of Central Asia, and is culturally more diverse than the now dominant Han culture.

Unfortunately the clash of cultures, and especially the imposition of one on top of another, always leads to friction; and China has had to maintain a firm grip on Xinjiang over the years to prevent it relapsing into civil unrest. The imposition of the communist ideology and administration, an atheist state, a “unifying” language (Mandarin) while being governed by a different race can sometimes flare up locally. Xinjiang’s ethnic population is mainly made up of Uighurs, a Caucasian race that is the descendants of an old Central Asian Khanate dating from 750 AD. Upon the collapse of their monarchy in 848 AD, they ended up working mainly as civil servants for the Mongol Empire before being further scattered across Central Asia in the aftermath of the eventual breakup of regional Mongol rule in 1368. Ever since they have been based mainly in Xinjiang, while occasional attempts to recreate a Uighur homeland have been put down by the stronger military forces of the time. Modern Uighurs are Muslims, although historically they have moved from originally being Manichaens, an ancient Iranian Gnostic religion, converting to Buddhism around the ninth century and then again to Islam in the mid 14th century. All that aside, there is no doubt that over much of the past 1,000 years, the Uighurs in terms of culture, art and history have been the dominant culture in Xinjiang, yet have been unable to assert that into an administratively stable regime. China now classes them as a Chinese minority people.

Xinjiang itself is run as an “autonomous region” (China has five of these, the others being Tibet, Ningxia, Inner Mongolia and Guangxi). It is supposed to compromise between the Han culture of the Chinese communist party and China’s local ethnicities, however, inevitably, Uighurs do not make the major decisions. And there have long been claims of Han domineering and insensitivity towards the Uighur culture. This has especially had an impact on religion and the use of mosques, and in the local written language, which is related to Arabic and Mongolian script. Chinese governance of the region has not always been sympathetic, and given Xinjiang’s history of violence and unrest this is not altogether surprising. But it does mean that unrest simmers beneath the surface on occasion, that the Chinese presence can be resented and that crackdowns on dissent can be fast and deadly. The riots of last year are illustrative of this, but also seemed to act as a wake up call to Beijing. Money has been pouring in to Xinjiang to better improve the lives of the residents, and new infrastructure and development projects are taking off throughout Xinjiang.

Urumqi
Urumqi is the regional capital, and is about a five-hour flight from east China. A city of 5 million, it lies in the northwest of Xinjiang and is also connected via internal flights to most major Chinese cities and to international destinations throughout Central Asia and its capital cities and major trading hubs. Twenty-one international airlines are based out of Urumqi, making it a convenient base for conducting business throughout Central Asia. Urumqi is also well connected via an extensive rail network, to many of the Central Asia destinations. It is also expensive compared with the rest of Central Asia. Urumqi is the region’s wealthiest city, and connections with the rest of China’s cheap manufacturing bases mean it is also a trading hub for goods that citizens of other Central Asian cities cannot otherwise obtain easily. In fact, the middleman markup on Chinese made goods is so high elsewhere in Central Asia that those who can afford it either fly or take the train to Urumqi or Kashgar to buy Chinese made goods directly.

Urumqi is divided up into two sections, a traditional, more Uighur area, and a more Chinese part of the city. However, the main markets are in the Uighur area, with department stores and workshop attachments selling materials and goods from China as well as from Central Asia. The variety is staggering – this is a melting pot after all – from entire petrified trees, to leather and fur hats to enamel ware. Urumqi also has several development zones, namely the Urumqi Economic and Technological Development Zone, the Urumqi New and Hi-Tech Industry Development Zone and the Shihezi Economic and Technological Development Zone. The city, like many others in Xinjiang, is a beneficiary of Beijing’s ongoing “Go West” campaign, and depending upon the type of industry and size of the investment, attractive incentives can still be obtained for investing here that have long since disappeared elsewhere in China.

For a Central Asian focused business, Urumqi as a regional hub for Central Asia, and possessing excellent connections to the rest of China makes a lot of sense. It is a good base for agricultural products as Xinjiang possesses much good quality and fertile land, making it ideal for the production and processing of various crops for sale to Central Asian markets. One client we have grows and dries tomatoes, the dried whole product is sold onto markets in Turkey and Mediterranean Europe; while their tomato paste is sold throughout Central Asia and into the Middle East. It is a multi-million dollar turnover business that required little capital investment, but did need an intrinsic understanding of the Central Asian regional markets. Urumqi is also a good sourcing and manufacturing market for the sale of product elsewhere in China – it is possible to negotiate longer term tax incentives to invest here, while wage levels and factory space and utilities costs are still low compared to the rest of China.

In terms of GDP, the latest available figures for 2008 showed Urumqi with a per capita income in excess of US$4,000 per annum. That’s about half of what is achieved in Shanghai, and is streaks ahead of the per capita income of any of the other neighboring Central Asian cities. Almaty, just across the Tian Shan Mountains in Kazakhstan, has a per capita income of about US$1,800 per annum, and that is also considered a wealthy city by Central Asian standards. The 2009 troubles interfered with this to some extent, however things are now getting back to previous trade and income levels. Xinjiang, in order to quell potential unrest, and keep it away from Islamic militants close by in neighboring countries, is deliberately being introduced to wealth in order to subdue the potential for anarchy. Increased trade with neighbors such as Kazakhstan, Uzbekistan and Pakistan is being encouraged through the development of Chinese funded cross border infrastructure designed to deter local residents away from the influences of religious fundamentalism and towards trade, prosperity and peace. In Xinjiang, for the most part, that policy appears to be working, and as long as it continues to, the likelihood of developing potential and investment success on a regional basis increases.

Kashgar
In terms of other areas of Xinjiang, Kashgar is a focal point due to its ancient silk road trading roots. Linked to Urumqi by air, train and expressway, it is a two-hour flight away from the regional capital. Kashgar is also undergoing some radical changes. The famous Sunday market has undergone a major overhaul, and is now divided up into two parts, the old bazaar area is now all mainly hard goods, the animal market having been moved a couple of miles away. The former is now full of Chinese low end products; while on the perimeter lie the more interesting regional traders, in carpets, metal ware and other Central Asian products that can be purchased here. However, they are sold at a premium in Kashgar – if looking at buying Central Asia goods then you’ll get better deals in Almaty, Tashkent, Dunshanbe, and even Kabul than you would in Kashgar. Silk carpets from nearby Hotan (also in Xinjiang) are reasonable value however, but carpets from Afghanistan can be pricey. Low-end machine made carpets, including those found in stores such as Wal-Mart and Ikea, are also manufactured here, proving there is global demand for local know-how, talent and knowledge. The animal market meanwhile deals in everything from exotic Arabic stallions to Tibetan yaks and Mongolian camels; however most buyers here are looking for sheep, goats and donkeys, many of them for stud purposes as well as to top up herds with some new blood. The market is enigmatic as it is still a meeting place for Central Asian traders who have come across the mountain passes to be here. Few have passports, yet the Chinese manage this incursion and deal with the traders well enough in terms of security and movement.

Kashgar prefecture, which extends further south all the way to the border with Pakistan at Taxkorgan (the latter is a great trip to take in a Land Cruiser, allow five days along the Karakorum Highway), has a population of about 3 million, of which about 750,000 live in the actual city. Substantial development has been taking place here, however much of it has not been ethnically sensitive. Traditional mud and wood built structures, while potentially dangerous, remain enigmatic but are being systematically replaced by white tiled high rises, destroying a lot of the ancient city character. Those old alleyways and passages that seemed so descriptive of Kabul were the background for the award winning film “The Kite Runner” which was filmed completely in Kashgar. The redevelopment of the city though is intended to provide better infrastructure, and with it, increased trade opportunities for the city with the rest of Central Asia. Kashgar has China’s westernmost railway station, and there are plans to extend this down into Gilgit in Pakistan, and potentially extend that to Islamabad. A route west to Kabul, along the eastern finger of Afghanistan that touches Xinjiang near here is also being considered. Much of the Afghan territory between China and Kabul lies under the control of the Afghan government and is anti-Taliban, although obvious problems remain, not least the construction of a railway across some seriously difficult mountain terrain. China’s experience in building the rail line to Lhasa however may yet come to fruition in linking Kashgar by rail to Pakistan and Afghanistan sometime in the future. Kashgar has also been mooted as being a potential new special economic zone, which if approved will presumably give it the same status and conditions that the South China city of Shenzhen enjoyed in the 1990s. That would introduce income tax rates of no more than 15 percent; standard tax holidays of five years and could potentially trigger a boom in the city. How much of that would be purely for smart Chinese manufacturers looking to “export”back to the rest of China as opposed to truly developing Kashgar as a Central Asian hub is something the Central Government is going to have to monitor. Clues as regards this will come in the passing of legislation relating to tax holidays or rates being linked to regional customs administration. Speculators have already moved in, and property prices have soared on the potential alone. However, Kashgar at present I feel is still a bridge too far and clarification is needed on its future status to make sense investing here. However it remains an enigmatic possibility for investment, and one well worth visiting. Should the SEZ deal be approved, expect an almighty scramble to get in.

Turpan
The city of Turpan lies east of Urumqi, and takes you into the edges of the Taklamakan Desert. It is essentially a man-made oasis, irrigated by channeled melt waters from the Tian Shan Mountains that rise 1,500 kilometers to the west of Urumqi. Turpan sits in the Tarim Basin, the second lowest point on the earth; hence gravity feeds the waters downhill. Turpan developed as a staging post in ancient Silk Road days, where caravans could replenish and stock up on food and supplies. The land here is also fertile, despite it being in a desert; the basin is the remains of a prehistoric seabed and is productive if irrigated. Close by lie the remains of ancient rock formations; crucially for agriculture these provide shelter from the excessive summer heat and protection from the worst of winter. Temperatures can vary here from high 40s in the summer to -25 in winter. Vines predominate here for several reasons; firstly because they are a fast growing plant whose leaves are edible and also provide shade, and also the grapes. Several different varieties of grape are grown here, and there has been a viniculture industry here for over 2,000 years. The (originally joint French-Chinese venture) LouLan vineyard is based here, and make excellent wines, as do a number of other producers. Turpan also produces a huge variety of fruits, from apricots, melons and cherries to Central Asia staples such as pomegranates, walnuts and almonds. Turpan represents potential opportunity for the agricultural industry, again with a focus on the Central Asian market.

Operational practicalities
In the study that I commissioned, one thing stood out – an overseas employee based in Xinjiang needs to have Muslim sensibilities. While there are opportunities – that have already largely been taken – for sale of products to China’s markets elsewhere, Xinjiang’s potential for the foreign businessman (I am discounting the oil and gas industry here) lies in the markets closer to its borders. The Central Asian cities of Almaty, Tashkent and Samarkand are far closer to here than Shanghai, Beijing or Guangzhou. Both providing the standards needed, some products for example may require Halal certification, to being more easily accepted by the local indigenous and Central Asian businessmen and traders dictate a need for such a background. Having that also assists with the development of other foreign investment into the region. There are large increases in the amount of Turkish and Saudi Arabian money into Xinjiang in addition to the extant involvement of Xinjiang’s neighboring countries. Consequently, the ability to be able to go to the Mosque, read Arabic or Uighur, speak the language and be familiar with the Central Asian and Islamic business culture are a prerequisite to being successful here if trading to the immediate west.

There are of course opportunities for the average Westerner; however those regional tensions can cause problems for the small investor. The New Zealand owner of Urumqi’s only bar had to close down after a six-month curfew effectively closed his business through lack of custom. That cost him the five years of development that had been put into the business. While alcohol is always going to be a difficult sell in a predominantly Muslim city, it also illustrates the problems that can arise in volatile regions such as this. Tibet is another region with similar problems. Consequently, investors need to look at Xinjiang and add in that additional risk factor. If things do get out of hand in the region it can take a year to get back to normalcy again. That aside, the “Wild West” of Xinjiang most definitely has plenty of potential, and should be on the radar for anyone with an eye on Central Asian or regional sales. I first helped a European client establish a representative office in Urumqi back in 2001. I would love to see more investment into the region, and the experience I have gained of the area over the years suggests to me, at least, that Xinjiang’s time as a viable and sustainable investment destination for the right business has arrived, and will continue to develop. As they say, “watch this space.” My firm is looking again at the region and so should investors involved in agricultural processing, wind energy, logistics, packaging and Islamic focused trade.

In terms of staying in Xinjiang, I can recommend the following hotels for either historic or luxury value. Details can be found online.

Urumqi: Sheraton Hotel, Hoi Tak Hotel
Kashgar: Semen Hotel (ex Russian Consulate), Qinibagh Hotel (ex British consulate)
Turpan: Oasis Hotel

Also, the long-established John’s Information Café is a long time source of great up to date happenings within Xinjiang and Tibet, he also runs tours and provides accommodation. Mainly based in Kashgar, but with operations elsewhere, John also arranges visas and tours to other Central Asia countries and cities.

Chris Devonshire-Ellis is the principal and founding partner of Dezan Shira & Associates. The firm has 18 years of foreign investment experience throughout China, including Xinjiang. For assistance and advice over laws, taxes and incentives for foreign investment in Xinjiang please contact the firm at info@dezshira.com. Chris also contributes to India Briefing , Vietnam Briefing , Asia Briefing and 2point6billion

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