OPINION:
Newly released trade figures show that China is feeling the pain in its ongoing economic spat with the United States. Exports are reportedly down for the 12th consecutive month,with trade volumes 1.1 percent below where they were last November. China’s imports actually grew by 0.3 percent last month, despite experts forecasting a 1.4 percent drop in imports. This translated to a trade surplus for China $8 billion below projections.
The United States, meanwhile, saw a 7.4 percent drop in the goods trade deficit in October and 23.1 percent year-over-year decline of imports from China — signs that the U.S. economy is weathering the storm.
But while the United States may seem to be heavily competing with China, it is not paying enough attention to investment competition and influence in emerging markets. The 21st century great power rivalry is not simply a matter of military strength, but also one of trade, economics and investment.
Beijing’s $2 trillion Belt and Road Initiative is an economic gambit to expand the old Silk Road connecting Asian and European markets. Sitting at the epicenter of Silk Road is the world’s largest landlocked country — Kazakhstan — flush with the hydrocarbons and minerals vital to China’s economy needs.
But while China’s trade with Kazakhstan hovered near $12 billion in 2018, the United States managed just $2 billion in two-way trade. China’s trade with Central Asia totaled $22 billion, up from $19 billion in 2016.
Kazakhstan is also looking to expand into modern industries and services, and is seeking to build a modern financial services and capital markets sector. The Astana International Financial Centre (AIFC) is the flagship of this effort.
This is where the United States and the West can better integrate themselves with the promising economies of Central Asia.
AIFC is a financial hub that officially launched on July 5, 2018. It was conceived by Kazakhstan’s First President Nursultan Nazarbayev to be a financial partner for state-owned companies seeking privatization, to raise capital, or to invest in Kazakhstan. The new international finance center — which hopes to one day be comparable to Singapore, Dubai and Hong Kong — is doing its part to improve Kazakhstan’s investment climate.
Part of that is through the Astana International Exchange (AIX) established under AIFC as the key trading platform that is helping in bringing new capital market reforms and privatization measures to the Kazakhstan economy. AIX serves as a platform for government bond and corporate stock listings – first among the Central Asian republics. Some 235 companies are now working with AIFC, bringing a total capitalization of nearly $2 billion for the first half of 2019.
AIFC is expected to become a regional facilitator for Belt Road Initiative projects, and it is no surprise that China is one of the country partners of AIFC.
To be fair, AIFC does have strong U.S. partners as well, including Nasdaq and Goldman Sachs. Citibank is the only U.S. bank with an operating license in Kazakhstan, and one of its largest foreign investors. Others are likely to join.
AIFC is helping privatize existing state-owned natural resource enterprises such as uranium ore giant Kazatomprom, which was listed on both the London Stock Exchange and AIX as a joint offering. Kaz Munay Gas, the national oil and gas company, is also expected to offer shares through AIX with a $6.5 billion initial public offering (IPO). Says Forbes: “Everyone from corporate investment banks to fund managers in emerging and frontier markets is waiting to see what happens with the planned privatization of Kaz Munay Gas, the state-run oil and natural gas giant.”
Of course, AIFC’s larger aims are to open up the country’s capital markets to investors from East and West, invite international investment, increase fintech innovation, privatize the country’s state-owned assets and promote financial inclusion.
Kazakhstan is climbing the rankings as a global investment destination. The country is now ranked 25th on the World Bank’s annual Ease of Doing Business report, up from 36th in 2017.
The finance center boasts a commendable and necessary feature for any successful financial institution: its own Independent dispute resolution system based the English law, a draw to investors who are (rightfully) leery of corruption risks in emerging economies and courts.
A special tax regime is also in place which is sure to attract attention from investors, foreign and domestic. AIFC grants an exemption from payment of corporate, individual income, land tax and property tax for a period of 50 years (until the end of 2065). In addition, AIFC has adopted an investment tax residence program that aims to attract foreign private capital to the country in exchange for the investors and their families receiving a multiple-entry visa to Kazakhstan.
Given that it was launched only about a year ago, AIFC has performed “unusually strongly.” The center shot up 10 spots to rank first in Eastern Europe and Central Asia on the Global Financial Centers Index, and 51st worldwide, according to Forbes.
Of course, AIFC does not lack challenges — at the very least, it has to compete with the globe’s well-established international financial centers. But AIFC is a promising initiative, one that is taking full advantage of Kazakhstan’s new role as a regional leader. It is clear that China sees the geo-economic potential of the massive Central Asian country.
It’s time that the United States does as well.
• Daniel Witt is the president of the International Tax and Investment Center (ITIC).
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