China investment Mongolia

At the hub of China’s “One Belt, One Road” – a visit to Manzhouli, the frozen city where China, Russia and Mongolian converge

Manzhouli

Where did you spend Christmas? Mine was spent in temperatures reaching 38-below zero on the frozen lakes and grasslands of Northeastern China. I was there to give a speech on Christmas Day at a conference in Manzhouli on Russian, Chinese and Mongolian economic integration.

Manzhouli is a Chinese city but with a unique pedigree and location. First settled around 1900 by the Russians building the Trans-Manchurian spur of the Trans-Siberian Railway, it was then conquered by the Japanese before China took control after World War Two. It sits at the single point on the map where the borders of China, Russia and Mongolia all converge. Manzhouli’s train and road border crossing between Russia and China is the busiest inland port in China, with most of China’s $50 billion in annual exports to Russia passing through here.

China, Russia and Mongolia are now partners in China’s ambitious new strategic trade initiative known as “One Belt, One Road“, or OBOR, as well as the Chinese-sponsored Asia Infrastructure Investment Bank. The conference was meant to encourage closer trade ties among the three. OBOR is designed in part to redirect China’s investment focus away from more developed countries, especially those participating in the US-led Trans-Pacific Partnership.

China’s exclusion from TPP is perhaps the biggest single economic policy setback for China in the last decade. The TPP countries include most of China’s key trading partners. If enacted, TPP will cause trade and investment flows to shift away from China especially towards Vietnam, Malaysia and Philippines. The three are all parties to the TPP agreement, and so will benefit from preferential tariffs. All have aspirations to take market share away from China as a global manufacturing center. TPP will grant them a significant long-term cost and market-access advantages.

OBOR is a consolation prize of China’s own construction. The countries inside the OBOR plan look more like a cast of economic misfits, not dynamic free traders like the TPP nations and China itself. I don’t believe anyone in Beijing policy-making circles believes that increased trading with OBOR nations Pakistan, Myanmar and the Central Asian -stans is a credible substitute. China’s best option is to find a way to persuade TPP countries to allow it to enter the group. There’s not even a remote sign of this happening. China was excluded from TPP by design.

China does not live in a particularly desirable or affluent neighborhood. It shares land borders with fourteen countries. Of these, Russia is by far and away the richest of these countries. Mongolia, with its three million inhabitants most of whom still live in yurts as nomadic herdsmen, ranks third. This gives some sense of how poor many of the places that are now the focus of China’s OBOR are.

Another key component of OBOR, but one often overlooked, is to open up new markets to the most troubled part of China’s industrial economy, the manufacturers of basic products like steel, aluminum, basic machinery and chemicals, turbines, cars, trucks, trains. They all are suffering from acute overcapacity with vanishing profit margins up and down the supply chain.

The Chinese leadership recently announced that dealing with overcapacity in China will be one of its major economic policy priorities for 2016. The problems are most severe among state-owned industrial conglomerates. The Chinese government is their controlling shareholder. Two obvious solutions — shrinking capacity and cutting employment — are, for the time being at least, politically off limits. OBOR is meant to be a lifeline.

China itself cannot absorb this excess domestic capacity. Demand for basic industrial products is already evaporating, never to return, China is already well along in the transition to a service economy. China will pay or lend tens of billions of dollars to poorer OBOR countries to finance their imports of Chinese capital goods. The trade won’t likely be very profitable but it will keep jobs and revenues from deteriorating even more sharply.

You may download the seven-page English-language talking points, map and charts from my speech by clicking here.

At night, there was a banquet for political leaders from the three countries. Afterward, a beauty contest was staged, featuring Chinese, Russian and Mongolian contestants in bikinis and evening gowns. You can see photos here, including ones of me with the Chinese winner and the nine Mongolian contestants. An ice fishing expedition was also organized.

If OBOR does achieve its goal by drawing Russia and Mongolia into a closer economic relationship with China, Manzhouli stands to benefit more than anywhere else in China. As if in readiness, Manzhouli storefronts are in Chinese and Cyrillic, the new airport terminal is in the Russian style, and the main park in the city lorded over by a 10-story Matryoshka doll.

For now, though, no one is seeing much sign of OBOR stimulating greater trade. The main focus for investment in Manzhouli is in tourism facilities to attract Chinese summer vacationers to the surrounding grasslands, China’s finest. This time of year, the cement tourist yurts are empty and the long-haired riding ponies are left to graze and amble in the arctic wind and snow.

 

 

 

 

Mongolia: Investment Banking Adventure on the Grasslands

 

Mongolian grasslands

Investment banking isn’t meant to be particularly fun.  There’s too much pressure, too much market uncertainty, too much money on the line. You toil in a big urban office tower, dressed in a suit and tie, and spend sixteen hours a day moving commas around in an Excel spreadsheet.

This may be true for some, or even most, investment bankers. But, it is decidedly not the case for me. My working life is a delight. Occasionally, it’s better than a boyhood dream of adventure and discovery.

Take this recent workday: out the door and on the road by 6am to beat the traffic. In 15 minutes, we’ve left the city behind and cruise south on a two-lane highway. The sun is rising over stubby hills, more like scattered lumps of clay.  Gradually the land flattens, narrow valleys open into broad vistas of low willowy bush turned a golden autumn color.

I’m in Mongolia, and we’re driving straight across the grassland. For two hours, we drive down a straight paved road, hugging close to the single track railroad line that connects Mongolia’s capital Ulan Bator with Beijing to the south and Moscow to the distant northwest.

The train from Beijing chugs by at around 9am, moving slowly, at around 30mph (50kph). I took the train once more than thirty years ago. It’s a six-day trip from Beijing to Moscow. From this brief glimpse, nothing much has changed. Same green-colored carriages, dual diesel locomotives and a restaurant car. I remember eating well the first day, when the train was still in China. After that, the kitchen crews changed and little or nothing edible came from the restaurant car kitchen. I ate mainly Chinese preserved duck eggs (皮蛋)and small snacks bought on the platform as the train crossed Siberia.

Today I’m in a comfortable new Lexus four-wheel drive jeep. We stay on the paved road for 120 miles (200km) and then turn left onto a dirt road. It’s really just a narrow path worn in the grass. We pass a small abandoned Soviet era air base, presumably once meant to be a secret facility 250 miles from the Chinese border. All that remains are 30 fortified hangars, a crumbly old runway and miles of barbed wire fencing.

We take this dirt road southeast another 100 miles or so and then pull into the iron ore mine I’ve come to visit. The whole way along the dirt road we pass nearby huge herds of grazing animals  — sheep, cashmere goats, Mongolian horses and cows. We see few vehicles along the road. Every ten miles or so, set back about one mile from the dirt path, we pass a small grouping of white Mongolian yurts.

I ask the driver to stop at one, so I can have a closer look and meet the nomads. The driver is Chinese, but was born and raised in Mongolia. He translates. We get a very warm welcome from the three people living in the two yurts, one of which has a solar panel. It’s an older man together with his son and daughter-in-law. This is their summer encampment. They have hundreds of sheep, horses, cows roaming around.

Mongolian yurt

The wife urges me to help myself from a bowl of, well, I don’t know what. It’s a small heap of brownish solid irregularly-shaped tubes of different lengths. Something home-made. I prepare myself for something sour and strange. Instead, it’s sweet and chewy, a preserved candy made from yogurt.

Next, the men pour me three cups of their home-brewed alcohol, a slightly-sweet not very alcoholic drink distilled from cow milk. The flavor is crisp and dry, like a slightly-corked chablis.  By the time I’m back in the car, the younger man is atop a horse and riding quickly off towards a distant ridge.

I first learned about the iron-ore mine from its owners, a Chinese SOE, about four months ago. They bought the mining rights four years ago, built the mine, hired the local workers and began producing high-grade iron ore two years ago. It’s an open-cast mine working a particularly high-grade seam of iron ore. The rock is over 30% pure iron.

As mining operations go, they hardly get any simpler. Caterpillar backhoes scoop up rock, which is then put on a conveyor belt for a simple mechanical sorting operation. This doubles the grade of ore. From here, the ore is trucked seven miles to a railroad platform the company built. It is loaded on to open freight cars and sent by rail directly to supply a large steel mill in China’s Hebei province. Even though the iron ore price has fallen over the last several years, the Mongolian mine makes very good money. It is probably the lowest-cost and highest-quality ore supplier in or around China, the world’s biggest market for iron ore. They dig money out of the ground.

Iron ore Mongolia

The owners were eager for me to visit. They want to retain China First Capital to act as their investment bankers. They are considering a possible sale. While the mine is making very good money, with almost 40% net margins, the SOE is considering a sale for two reasons. The parent company is huge, one of China’s largest mining businesses. Their main business is coal mining. This is their only iron ore mine and only project in Mongolia.

Chinese companies were among the first to secure mining rights in Mongolia after that country’s 1990 democratic revolution. But, over time, Mongolian policy has gradually shifted. Chinese companies are less welcome. The Mongolians have grown more and more anxious that their tiny economy will become too dominated by China. (Mongolian gdp is $15bn, or less than 0.2% China’s $8 trillion.) They know their abundant low-cost mineral resources — coal, copper, iron ore — will almost all end up being sold to China. But, they seem to prefer when the mines are owned by companies from elsewhere. North America, Europe, Russia are all preferred.

In the two years since it began operating, the mine has made excellent progress. It should keep producing for another 30-50 years. Its stated reserves are probably less than one-fifth of the actual total. It’s all surface-mineable, all high-grade. There are bottlenecks. The company would like to increase the number of loaded train cars it sends south to China. But, it’s so far been a hassle to negotiate with the Mongolian state railroads. A non-Chinese owner would likely have more luck. Also, the equipment is not winterized, so they produce and ship ore only about six months a year.

After a lunch of boiled Mongolian beef bones (tastes much better than it sounds), we begin the drive back, stopping first to visit the rail platform. After that, I jump out of the car once, to climb a small hill topped by a pillar of small stones one-meter high. It’s a simple Tibetan Buddhist stupa. Everywhere, in every direction, the scenery is breath-taking in its simplicity and grandeur.

Mongolian stupa

I’ve only once before made a car trip across such a large expanse of largely-unpopulated and rarely-visited land.  That was 24 years ago, back when I was working as a foreign correspondent for Forbes. I was in Namibia, and drove the 200 mile length of the fenced-in diamond mining concession jointly owned and operated by De Beers.

In general, no one except De Beers senior staff is allowed to enter this huge 10,000 square mile pristine piece of Africa. That day I recall seeing a few ostriches running across the sandy desert. The De Beers team mentioned seeing packs of wild elephant.

This day, on the Mongolian grasslands, animals are plentiful. All are fattened by a summer of plentiful grazing, and look remarkably healthy.

The nomads these days are selling fewer and fewer of their herds. They sell just enough to supply the demand in Ulan Bator, a city of about 1 million. So, their herds grow larger every year by about a net 20%. They have more meat on-the-hoof and more milk than their ancestors could dream of. It’s never been a better time to be a yurt-dwelling Mongolian herder.

But, their lives are still tough, especially during the long winter, when they huddle together in their yurts, with their animals sheltered nearby. Temperatures can reach minus 40 centigrade. More and more Mongolians are leaving the grasslands and migrating to take salaried jobs in Ulan Bator. That city has more than doubled in size in the last 20 years.

I spend a few hours of my free time back in Ulan Bator visiting the city’s largest Tibetan Buddhist monastery and the Zanabazar Museum, which has the most remarkable collection of 19th century Tibetan thangkas, painted and applique, I’ve seen anywhere. To my knowledge, there’s nothing comparable left in Tibet or elsewhere in China.

Mongolian thangka

I’m fortunate to own a small collection of antique thangkas. I’d been waiting twenty years to visit the Zanabazar Museum.

I should have a chance to come back to Mongolia next year, once the frigid winter passes. Maybe this next trip I’ll be bringing along some potential buyers for the mine. I’m doing exactly the kind of work I most enjoy, for clients that are a pleasure to work with. Every place I travel for work I’m welcomed with the greatest degree of hospitality, fed and housed royally.

Two other positives of my job: I need to open Excel only occasionally, and I almost never have to wear a jacket and tie.