As the China-Central Asia Summit concluded in Xi’an on May 18th and 19th, with the presence of leaders from China and the five Central Asian republics – Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan, relations between China and Central Asia are expected to strengthen. China’s increased presence in the region presents an opportunity for the development of Khorgos.
It was in Kazakhstan that President Xi Jinping first announced the Belt and Road Initiative (BRI), also known as the New Silk Road, in 2013. Kazakhstan seized this project to enhance its exchanges with China and aspired to become a continental hub between Europe and Asia. In pursuit of this goal, the Special Economic Zone project in Khorgos, located in the Almaty region, which was initiated in 2011, gained momentum.
This project has successfully attracted foreign investors. In 2018, DP World, the third-largest port operator in the world based in the United Arab Emirates, acquired 51% of the share capital of the dry port in the Khorgos Special Economic Zone. While the new city has witnessed increased rail traffic between China, Russia, and Europe in recent years due to the Belt and Road Initiative, the economic impact on the ground has remained limited.
The Gateway between China and Central Asia
Paradoxically, the lack of connectivity between China and Kazakhstan has contributed to the success of the Special Economic Zone. The two countries use different rail gauges, requiring a technical stop to transfer goods from one train to another. Despite the pandemic, rail activities in Khorgos have not been slowed down; on the contrary, with road transport between China and the rest of the world halted, rail transport has become an attractive option for Chinese and foreign companies. However, the pandemic has hindered local commercial and industrial activities. One of the objectives of the China-Central Asia Summit is to revive momentum for economic development in the Khorgos region.
- To attract new investors to the Khorgos Special Economic Zone, China and Kazakhstan need to work together on several fronts.
Sustained Railway Traffic
The activities of the Special Economic Zone largely depend on railway traffic between Europe and China. While there has been growth in goods transported from China to Europe, the volume of trade from the West to the East is less significant. The robustness of rail transport from China to Europe is a result of subsidies provided by local Chinese authorities to their companies, making rail transport affordable. If the local authorities were to reduce these subsidies due to deteriorating economic conditions, rail traffic could be affected, and Khorgos would suffer from this slowdown.
- Therefore, to develop Khorgos, it is necessary for China and Kazakhstan to continue making rail transport attractive to Chinese and foreign companies, and to establish new connections throughout Central Asia that pass through this border city.
Greater Sino-Kazakh Cooperation
For Khorgos to thrive, stronger coordination between Chinese and Kazakh authorities at the local level is also required. For instance, Beijing’s decision to end its Zero Covid policy in late December 2022 caught Kazakh authorities off guard, as they were not prepared to reopen the border and manage the influx of travelers in such a short period, causing frustration among cross-border entrepreneurs. It was only in April 2023 that the Special Economic Zone was able to resume full activities.
- The establishment of new transboundary governance tools at the national and provincial levels would better address the needs of local entrepreneurs.
Intensifying the fight against Illicit Trade
As a border city, Khorgos faces corruption issues. At the beginning of 2022, Kazakh President Kassym-Jomart Tokayev acknowledged this situation. Customs duties were not consistently collected, and the figures for the volume of trade differed between Chinese and Kazakh authorities, suggesting the existence of ongoing illicit trade from China to Kazakhstan. Since then, several investigations have been conducted, and the Tokayev government is working to rectify the practices carried out by certain administrations and companies in Khorgos.
- The establishment of a Sino-Kazakh joint unit would enable more effective combating of smuggling at the border and provide reassurance to investors.
Despite the significance of Khorgos for Kazakhstan and China, the development of the Special Economic Zone has faced numerous delays, worsened by the pandemic. It was only in December 2022 that an agreement was reached to resume the construction of the Kazakhstan-Chinese International Industrial New City project, which is expected to house new Chinese-funded factories.
- The timely completion of these projects will demonstrate to potential investors the commitment of Kazakh and Chinese authorities to sustain the Special Economic Zone, as some foreign investors currently perceive Khorgos as a diminishing priority.
Laying the foundation for local development
Beyond cross-border trade, the economic benefits in terms of local development have been limited. Khorgos has struggled to become more than a transit point. Without substantial industries, the cities of Khorgas (in Kazakhstan) and Huoerguosi (in China) have not experienced significant growth. It is crucial for Kazakh authorities to implement a development strategy for the city that accompanies the growth of the Special Economic Zone.
- Regional authorities must be involved in the development policies of the SEZ to ensure that local populations can benefit from economic opportunities and consider settling near the zone. This entails the planned development of an entire city surrounding the SEZ.
The war in Ukraine
Like other connectivity projects, the development of the Khorgos Special Economic Zone is influenced by the geopolitical context, particularly the wart in Ukraine. The future of Khorgos will depend, in part, on the resolution of the conflict and the economic situation in Russia. The summit held in Xi’an reflects China’s increasing influence in Central Asia. It is now clear that Russia will face difficulties in recovering economically from the war and investing in Kazakhstan.
- To ensure the development of Khorgos, Kazakhstan must prioritize projects with China, Central Asia, the Middle East, and Europe, while attracting investors from these regions.