Introduction
Chinese trade and investment in Mongolia have garnered greater attention in recent years, driven by the expansion of the Chinese economy and the development of the Belt and Road Initiative. However, Mongolian direct investment from China faces challenges despite several supportive factors. China has emerged as Mongolia’s largest direct investor, mainly due to the continued success of the Belt and Road Initiative, the development of the China-Mongolia-Russia Economic Corridor, and the construction of the Grassland Road in Mongolia. However, Chinese investment comes with its own obstacles. Obstacles to Chinese investment include legal, infrastructure, political, and social difficulties. This essay examines China’s investment conditions and challenges; it also proposes remedies with the aim of helping Chinese investors gain a comprehensive understanding of the investment environment in Mongolia.
Resources, especially mineral resources, are numerous in Mongolia. As of 2018, 6,000 mining locations and more than 80 minerals had been identified (Bolor-Erdene, 2019). The mining sector is vital to the Mongolian economy, with mineral output growing at an annual pace of 8% to 12% (Bolor-Erdene, 2019). Mongolia’s mining expansion has sparked the interest of the global mining community.
Mongolia has attracted around 5,000 enterprises from 20 different nations (Bolor-Erdene, 2019). With China’s economy growing, Chinese businesses have been increasingly keen to expand abroad. Regarding both flows and equities, China ranked third in the world for outbound direct investment in 2018 with $143.04 billion.
Difficulties
Chinese business operations and Mongolian cultural norms present the first challenge. At the heart of Mongolian society, the nomadic lifestyle has instilled a great respect for the nation and a strong desire to protect resources. Due to such customs and behaviors, some Mongolians are xenophobic (Jiang et al., 2021).
The opposition to foreign involvement in resource development and the idea that China’s expansion and investment in Mongolia amount to a theft of local resources are its most overt characteristics. Many Mongolians support preserving their country’s control over its natural resources. Many locals dislike how Chinese businesses are interfering with their political objectives.
Changes in policies have tempered the enthusiasm of Mongolian investment firms. For instance, consider the laws governing mineral resources. In 1994, 1997, and 2006, Mongolia established several laws governing natural resources. Since July 2006, when it first became effective, the present mineral resources legislation has undergone more than ten updates, most notably three changes every year in 2010, 2011, and 2014. Another example is when, following the adoption of laws by the Mongolian parliament in May 2012 restricting foreign investment in critical industries, Mongolian coal firms unilaterally canceled contracts with Chinese businesses that the two governments had approved in early 2013. They also imposed restrictions on coal shipments and raised coal prices, resulting in considerable losses for both parties.
Secondly, Mongolia has inadequate infrastructure; in 2013, the country moved approximately 21 million tons of commodities by rail. The following figures are reported: 10.7 million tons for internal transport, 6.8 million tons for export, 2.5 million tons for import, and 1.8 million tons for transit (Jiang et al., 2021). In 2013, 3.781 million people used Mongolian railroads, comprising 3.609 million domestic travelers and 172,000 foreigners (Jiang et al., 2021).
In Mongolia, a wide-gauge standard has been established, which has restricted economic expansion and, particularly, the export of natural resources. A result of outdated rail technology and equipment is a rise in the price of train travel between China and Mongolia. The primary electrical systems in Mongolia are found in the central, western, and eastern regions.
The third issue is global challenges; foreign money has never stopped vying for Mongolia’s resources and market. Additionally, Mongolia faces increased competition from international businesses due to the growth of Chinese direct investment in the country. Chinese companies operating in Mongolia run a higher risk since they are less skilled than their counterparts in developed nations in terms of management, technology, and professional and compound abilities.
Significant strides in economic cooperation have been made since the Republic of Korea and Mongolia established diplomatic relations. The two nations developed a comprehensive partnership in August 2011, establishing a medium-term strategy for energy development and natural resources cooperation (Li et al., 2020). The most favorable nation designation was permanently awarded to Mongolia by the United States, and various agreements were signed, including ones for customs cooperation, encouraging investment, and economic and trade cooperation. Japan, now Mongolia’s largest donor, is boosting its aid, even at no cost. Natural resource availability in Japan is limited, yet market demand is high. The two countries’ economic partnership agreement has given Japan a significant advantage in developing oil and uranium.
Comparison Before and After the Pandemic
Mongolia reacted rapidly to the initial COVID-19 outbreak in China in January. The nation closed all its schools on January 24, ordered the use of masks for all people, and began sealing its border with China on January 28. Additionally, the country issued its first public health alert regarding the new virus on January 10. (Liu et al., 2022). As of November 10, Mongolia has recorded 374 COVID-19 cases and no virus-related fatalities, demonstrating the effectiveness of these early precautions in containing the coronavirus.
Despite repeated waves of infection in more industrialized nations, experts worldwide have applauded Mongolia for its successful treatment of the virus. The WHO has created a DVD recognizing Mongolia’s response efforts. However, because Mongolia’s concurrent pandemic control efforts had such a significant economic impact, the UN and other international organizations raised concerns about the effects of COVID-19 on Mongolia’s future economic growth. After nearly ten years of rapid economic growth, Mongolia’s GDP is predicted to decline by 9.7% this year.
Early Impacts of COVID-19 on the Mongolian Economy
The first trade deficit for Mongolia since 2014 was caused by a 24.4% decline in exports and a 6.2% decline in imports in January. In addition, the Governmental Emergency Commission’s attempt to restrict coal exports, which had considerably boosted the nation’s GDP, in mid-February exacerbated the economic crisis in Mongolia (Lü et al., 2019). Early in the 2010s, the mining sector was primarily responsible for Mongolia’s double-digit growth. By 2019, it accounted for 25% of the GDP and 90% of all exports.
China is also Mongolia’s most significant trading partner, representing 89.1% of exports and 64.4% of total exports in 2019. Due to this, the relative health of the Mongolian economy is closely tied to the export of minerals and trade with China, both of which have suffered this year. China was Mongolia’s top export and import partner from January to July 2020, accounting for 68 percent of all exports and supplying 35 % of all imports (Lü et al., 2019). However, compared to the prior year, commerce with China fell by 10.7%. As a result, Mongolia’s entire international business decreased by 16.7% in the first half of 2020.
Due to COVID-19, coal shipments were halted in mid-February and only partially resumed on March 31. As a result, China’s coal imports from Mongolia decreased to practically half what they were in the first half of 2020. (Purevdorj, 2020). Border controls and China’s de facto ban on construction and production during the nationwide COVID-19 lockdowns also contributed to the drop.
The country’s pandemic preparation regulations have also damaged Mongolia’s mining sector. When the nation was deemed to be in an emergency in January, new laws were enacted, restricting the number of people who may work each shift and requiring mines to run at a reduced capacity. The nomadic labor supply in the mining sector was also affected by the closure of transit hubs, which reduced mining production.
Over the past three years, the tourist and hospitality industries have contributed almost 10% of Mongolia’s GDP. Mongolia boasts a wealth of natural resources and has the potential for ecotourism; consequently, the government has prioritized tourism to foster economic growth. The trilateral tourism agreements signed by China, Russia, and Mongolia in 2015 have helped increase the number of Chinese tourists visiting Mongolia steadily.
Consequently, China, which accounted for 36.4% of all international travel, surpassed Russia as Mongolia’s top source of foreign visitors in 2017. However, this year, the COVID-19 border restrictions in Mongolia have limited foreign trips, resulting in decreased hotel and tourism earnings. The result was a 42.9 percent decrease in overall revenue year-over-year for the Mongolian hotel industry in the first half of 2020.
Since January, business owners and operators have been alarmed by the Mongolian government’s month-by-month extension of the state of national emergency. According to Bat Purev (2020), a former director general of Mongolia’s Financial Regulatory Commission, the economy began to weaken around April. Since there were no tourists and no longer any paying clients for phone service, large hotels stopped providing telecom services. In addition, due to the reliance on individual budgets for prepaid phone service, many consumers stopped making payments or renewing their contracts.
China’s Coronavirus Recovery
When the government lifted the COVID-19 lockdowns nationwide in May and June, China’s economy experienced a remarkable recovery. Early growth was supported by pent-up demand, but significant state investments in infrastructure and technology have sparked China’s economic resurgence. Following a 6.8% decline in GDP in the first quarter, China’s economy expanded by 3.2% in the second quarter and 4.9% in the third. China could quickly reopen because of its early accomplishments, and state-led credit-easing and monetary loosening policies helped the industrial and construction sectors recover most rapidly. Unfortunately, the rest of the globe was engaged in a war to contain the virus at the same time.
The official shift in China’s policy away from GDP growth goals during the epidemic was shocking but long expected. As a result, the CCP leadership has given job creation a greater priority than GDP objectives as the economy recovers from the massive labor shocks brought on by the pandemic. As a result, China’s measured unemployment rate declined from a peak of 6.2 percent in February to 5.4 percent in September, indicating a modest but steady improvement.
Foreign observers are concerned that the National Bureau of Statistics (NBS) of China’s technique for gathering data on unemployment disproportionately ignores migrant and rural workers, who are disproportionately affected by lockdowns brought on by the pandemic. As a result, some overseas observers are concerned that China’s actual unemployment rate might be as high as 20%, significantly higher than the official figure (Odkhuu, 2017). In addition, experts expressed concern in a recent COVID-19 assessment of the country’s recovery about the disparity in activity levels indicated by large and small manufacturing enterprises.
Despite this, China has emerged as one of the few remaining global demand sources while the rest of the world’s economy has deteriorated. Consequently, its fall bounce was fueled by an export growth of 11.4 percent and a decrease in import growth of 4 percent. Additionally, recent indications of growing consumer demand have analysts cautiously optimistic about China’s recovery from the COVID-19 pandemic. Consumer demand was particularly heavily struck by the epidemic and recovered substantially more slowly than other sectors.
Apart from the epidemic, as with everything in 2020, China’s economy confronts a slew of additional challenges that could undermine its continued rise. Among these difficulties are continued trade tensions between the United States and China, including a slew of tariffs aimed squarely at the high-tech industries China relies on to support its economic recovery. In particular, beef prices have risen due to the pandemic’s impact on import regulations. Moreover, fears of a COVID-19 comeback in the winter have compounded China’s economic uncertainty.
Mongolian Recovery Tied to China
China’s coal imports increased early this year despite a decline in Mongolian imports due to lower fuel prices, a manufacturing boom, and increased construction. According to Bat Purev, a former director general of the country’s Financial Regulatory Commission, the decline in coal exports to China is due to Mongolia’s regulatory environment. He blames bureaucratic stumbling blocks for the implementation of a new green channel and border facilitation scheme. By enforcing these rules, border checks for goods and services should require less paperwork and quarantine.
According to Purev, Mongolia’s economy is relatively small, with coal and copper concentrates accounting for the majority of its exports. The economy may return to normal with a few adjustments to border restrictions or a modest shift in Chinese purchasing from Australia to Mongolia. Only a few million tons of coal and tens of thousands of tons of copper concentrate would be required for recovery. According to Purev, Mongolian coal exports account for only 10% of China’s demand. This demonstrates that Mongolia can quickly attain complete functionality by slightly altering the border rule.
In 2016, a significant agreement allowed Mongolian meat producers to access the Chinese market. Nevertheless, Mongolia’s capacity to grow its meat exports has been severely impeded by ongoing disease outbreaks and a failure to meet global standards for food safety (Sysoeva, 2018). Nonetheless, the nation’s authorities indicated interest in growing non-mining industry exports to China in 2019 and set a target of generating three times as much money from meat exports. If Mongolia can maintain its export standards, it may profit by filling China’s present meat shortages. Changes in regulations may also enhance Mongolia’s exports of beef and coal to China, aiding the country in a complete recovery from COVID-19.
Recommendation
The first piece of advice is for China to improve communication with Mongolia. Interactions between cultures and economies are crucial. Companies are encouraged to enhance artistic engagement and expand their networks for cultural exchange (Yun et al., 2021). Businesses can collaborate to establish cultural schools that aim to reduce the Mongolian population’s defensive attitude towards China and to enhance Mongolians’ understanding of Chinese culture and people. To win the acceptance and support of the locals for Chinese investment, businesses can also step up their assistance to the area. Companies, for instance, may provide communities with opportunities to help address the nation’s labor shortage and even enhance employee benefits.
It is crucial to have a thorough understanding of the investment objects. Before traveling overseas, Chinese firms should train their Chinese staff to grasp Mongolian national conditions, including cultural norms and etiquette. Before establishing investment plans, investors must also be aware of Mongolia’s rules for absorbing investment. When working for Chinese companies abroad, employees are expected to behave appropriately and respect the cultures and civilizations of others. Furthermore, they should prioritize environmental preservation, making the mining region green and ecologically restored, while keeping the interests of local inhabitants in mind.
Second, China needs to do more to support Mongolia’s infrastructure. Chinese companies may expand their assistance in improving Mongolia’s infrastructure, which has a fragile natural environment and inadequate infrastructure (Oidov & Davaanyam, 2021). It is a way to win over the Mongolian people to China and make it simpler for Mongolia to extract its resources and conduct future investment activities. China could also expand the availability of interest-free loans and free support for Mongolia’s infrastructure.
Thirdly, China should diversify its investments in Mongolia’s business ventures. While many big state-owned corporations overspend in the mining industry, small and medium-sized companies invest disproportionately in the light industry. The dangers associated with corporate development intensify due to firm competition. Therefore, Chinese companies should diversify their holdings and consider other underserved markets in Mongolia. In addition to assisting businesses in entering the Mongolian market, this also helps businesses share the risk of their investments.
Lastly, China should enhance investor competitiveness, as many Chinese companies have poor overall management, which negatively impacts investment growth. Suppose investors want to boost their competitiveness and build a brand with high-quality performance and industry influence. In that case, they should focus on growing their core businesses, developing their brands, and expanding their market share in Mongolia. Given the scenario in Mongolia, Chinese companies should also train their employees responsible for foreign investment management to comply with the country’s laws and regulations. To increase investor confidence in Mongolia, they can also entice international students.
Conclusion
Natural resources account for the majority of China’s investment in Mongolia, representing a significant portion of Mongolia’s total investment. The following are the causes behind China’s investment risk. First, due to their nomadic lifestyle and nationalism, Mongolians frequently despise and refuse to cooperate with China’s economic goals. Second, Mongolia’s uncertain and regularly changing rules increase investment danger. Third, China’s investment potential is constrained by Mongolia’s outdated infrastructure. Fourth, China’s investment operations are being challenged by industrialized countries.
In light of this, the following recommendations are made: First, the two countries should engage in extensive and compelling dialogue and, to the greatest extent feasible, reach an agreement on stable and solid rules and regulations governing Chinese investment. Second, Chinese investors need to do more research on the country, respect local culture when investing, and protect its natural resources. Furthermore, China may assist Mongolia with infrastructural development. Enterprises can diversify their investments and risk management strategies while strengthening their competitiveness.
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