China – Mongolia Relations

In the 12th century under its famed leader Genghis Khan Mongolia conquered much of present day China and continued to rule it for many years. Today Mongolia is rather smaller and is sandwiched between two present day geographical giants – Russia and China. For much of the twentieth century Mongolia was a satellite of the Soviet Union but the decline and fall of that empire permitted the democratic rebirth of the country in the early 1990s. A few years later the Chinese economic renaissance engineered a commodity driven boom in Mongolia as unparalleled demand for its copper, coal and gold from the South pushed economic growth rates in excess of 10% between 2011 and 2013.

But the glory days of the Mongolian economic boom were short lived, a collapse in commodity prices and rising anti-mining company sentiment frightened off overseas investors just as tax revenues from the nation’s ample natural resources tailed off. At the same time over-grazing and drought across the country led to a crisis in among the traditional herding community as livestock died en masse.

Since the opening of the gargantuan Oyu Tolgoi Mine Mongolia’s dependence on copper has rocketed, as has the nation’s dependence on China for exports and imports. Whereas prior to the mine opening Mongolia had  a fair percentageof its trade with South Korea, Russia and Japan, now it has developed an unhealthy dependence on its Southern neighbour, making it highly exposed to any downturn there.

Mongolia has sought to leverage its position by lobbying for new Russia to China gas pipelines to be built through the country – thus benefiting from transit fees and construction revenues. This looks to have paid off, although its not clear when production will begin.

The advent of the Belt and Road should also yield benefits for Mongolia – the country will benefit from Chinese built rail lines to its coal deposits and rail infrastructure generally looks set to be improved. These kind of plans are crucial for Mongolia to move past its resource dependency. Mongolia also hopes to encourage tourism from China and other Asian countries – all of which will be helped by improved infrastructure.

The country has made efforts to establish good relations with others outside of its neighbours, a recent visit by Modi of India led to a promise of USD 1 billion in investment infrastructure finance – although whether that will be delivered remains to be seen.

The recent election defeat of the Democratic Party has thrown more uncertainty for international firms into the equation, as they had done much to reassure investors that laws and taxes would not be changed to their disadvantage. The opposition Mongolian People’s Party (MPP) capitalised on the hard times experienced since the slowdown in 2012. Growth in 2016 is predicted to be 0.4 % compared to 17% in 2011, which perhaps tells us why the MPP swept into power in June.

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