Mongolia Needs a Strategy Amid Sino-Japanese Investment Competition

Mongolia Needs a Strategy Amid Sino-Japanese Investment Competition

by Yiyi Chen

China and Japan are two of the most financially influential countries in Mongolia’s geographic proximity. Each has a long history of trade with and investment in the later. Mongolia calls Japan its “Third Neighbor,” a term coined by then-U.S. Secretary of State James A. Baker in 1990. As a result, Mongolia adopted a policy aim to broaden its foreign relations outside of China and Russia to include countries like Japan, the United States, and European countries.

Japan has traded with Mongolia since the thirteenth century through the Steppe Road and is currently Mongolia's third-largest source of imports. Since Mongolia became a democratic country in 1990, Japan has consistently provided aid and assistance for Mongolia’s transition to a market economy.

China, on the other hand, is one of Mongolia’s closest partners and has traditionally been its biggest trader and investor. As of July 2017, China had directly invested USD 4.1 billion in the country, accounting for 30 percent of foreign investment in Mongolia. However, as China asserts more economic influence in Mongolia via the Belt and Road Initiative (BRI), the Tokyo-Beijing relationship has become increasingly complicated. With China’s rise, Japan has felt the urgency to balance and compete with China. Is the development competition between China and Japan beneficial or detrimental to Mongolia? How can Mongolia maintain and expand its interests within this complicated relationship?

China-Mongolia-Russia Economic Corridor

China began its comprehensive strategic partnership with Mongolia in 2014, which saw expanded economic cooperation prioritizing natural resources and infrastructure and a pledge to strengthen security cooperation. In 2014, Chinese President Xi Jinping initiated the China-Mongolia-Russia Economic Corridor (CMREC) as part of the BRI, furthering its goal to establish free trade and economic cooperation zones in cross-border cities. Some of the better-known projects include the China-Mongolia cross-border economic cooperation zone from Erenhot to Zamiin Uud and the Northern Railway Corridor, which extends the Mongolian national rail network to Russia and China.

By contrast, Japan started its development projects in Mongolia in the late 1990s and early 2000s. In 2003, Mongolia joined the Central Asia Regional Economic Cooperation (CAREC) Program implemented by Asian Development Bank (ADB) in which Japan is one of the two largest voting powers with 15.6 percent. So far, there are 301 ADB projects in Mongolia. Just one year after China announced the launch of CMREC, Japan’s Prime Minister Shinzo Abe signed Japan's first economic partnership agreement with Mongolia. He pledged to reduce tariffs and provide an additional USD 330 million in loans of 0.1 percent annual interest rate for the construction of a new international airport in Mongolia’s capital, Ulaanbaatar. Potentially inspired by the CAREC, China’s CMREC intends to target development specifically in Mongolia instead of all Central Asian countries.

Sino-Japanese Competition Opens Doors

While China and Japan fund different projects through their respective frameworks, the results of their projects have the potential to complement each other. For example, while Japan provided USD 500 million in soft loans to construct a new airport in Ulaanbaatar, the Export-Import Bank of China funded USD 140 million in soft loans to build a highway connecting the airport to the city. While an airport without a road leading to it is useless, a road leading to nothing is futile. Together, they improve the effectiveness of the infrastructure.

Sino-Japanese competition also provides more opportunities for Mongolia. In 2016, Mongolia invited the Dalai Lama to give lectures on Buddhist teachings to the people. At the time, the country was going through a debt crisis and sought a large loan from China, as it was the only country willing to lend money with low interest rates. In order to solicit the loan, Mongolia, a country with ancient ties to Tibetan Buddhism, apologized to China and pledged not to invite Dalai Lama again. This incident demonstrated Mongolia’s dependence on China to the extent that it was willing to forsake faith in search of financial assistance.

Japan serves as an alternative outlet for alleviating this economic pressure. While Mongolian-Chinese relations were strained by the incident concerning the Dalai Lama, Japan reached out to various financial platforms to help create an international aid framework, providing Mongolia approximately USD 5.65 billion in 2017. The International Monetary Fund, World Bank, Asian Development Bank, Japan, South Korea, and China backed this framework to relieve the financial challenges faced by Mongolia. During a time of political tension, diversification of loan sources helped Mongolia.

China and Japan’s Complementary Investments

It is interesting to note the difference between China and Japan’s investment strategy. While China’s investment in Mongolia occurs mostly through direct lending between the two countries or through several new Chinese-led multilateral frameworks, such as the Asian Infrastructure Investment Bank in which China has 26.6 percent of voting power, Japan contributes through multilateral organizations that have an established reputation and more experience, such as the Asian Development Bank, World Bank, and International Monetary Fund.

Each approach has its strengths and weaknesses. China’s accumulated experience in financing and building infrastructure projects and its ambitious BRI will enable Mongolia to be better connected with Europe and the rest of Asia through roads and sea ports. However, some Chinese investment lacks international oversight and comes with political strings, as was the case in the Dalai Lama incident. Also, Chinese investment in large infrastructure projects drove Mongolia’s capital expenditure surge in 2013, increasing the country’s debt burden between 2015 and 2016.

Japanese funding comes from more-transparent sources that can help diversify the risks for the borrowing country, providing global knowledge transfer and technical assistance to promote sustainable development. The downfall is that it has a higher threshold for Mongolia, whose credit rating is low and whose public debt reached almost 100 percent of GDP in 2017.

For Mongolia, this is an opportune time to work through China, Japan, other “Third Neighbor” countries, and international financial institutions. This international engagement will allow Mongolia to diversify from raw materials and be selective about the projects that can provide long-term sustainable benefits, such as investment in human capital and technological advancement. In the Mongolia-China-Japan trilateral relationship, each country has something to offer. Mongolia needs to establish its own development strategy based on its national interests in order to avoid being caught between its two stronger neighbors

Image: View of Ulaanbaatar with the Blue Sky Tower

Courtesy of Zazaa Mongolia / Wikimedia Commons


Yiyi Chen is a second-year MALD student at The Fletcher School concentrating on Conflict Resolution, and Law and Development. She interned with EastWest Institute in New York this past summer in which she was part of the Asia Pacific team working on a mapping project of China's Belt and Road Initiative, in which she contributes research on projects in the northeast Asian region. She aspires to further US-China relations and economic development in poverty areas.

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