First stop Kazakhstan – Demand for high value apparel on the rise
Xinjiang, the starting point of China's Belt And Road Initiative, has witnessed a pick-up in investments in infrastructure and industry. The Chinese government has stepped up construction of connectivity networks across the region, which accounts for 1/6th the area of China.
According to official data, Xinjiang's regional economy grew by 7.6% in 2016, 0.9 percentage points above the national average. Per capita disposable income grew 8.9% to 18,355 yuan, also faster than the national rate. By the end of 2016, the incidence of poverty in the region had dropped to 10% or less, according to a white paper issued by China's State Council Information Office. The fast growth was partly boosted by infrastructure upgrades, which the region's authorities deemed as crucial for tackling overcapacity, deepening supply-side reform, and supporting the Belt and Road initiative.
According to the provincial government work report issued earlier this year, Xinjiang plans to spend over 1.5 trillion yuan on infrastructure in 2017, including more than 200 billion yuan on new roads, 34.7 billion on the rail network, and 14.4 billion to upgrade the airport in the capital Urumqi. The region also plans to invest over 227 billion yuan in projects including water diversion, power transmission, and cloud computing, according to the report.
Since the initiative was proposed in 2013, Horgos, an old port bordering Kazakhstan and Xinjiang, has seen "explosive development," local officials said. Last year, more than 2,400 companies were registered in Horgos. The city's GDP was 5.12 billion yuan in 2016, up 278% from 2015. At the core of the Silk Road Economic Belt, Xinjiang is also quickly building up strong industries, including chemicals, information technology, machinery manufacturing, and textiles.
Northwest China's Xinjiang Uygur Autonomous Region attracted more than 538 billion yuan (US$ 85 billion) in investment last year, up 19.6% year on year, local authorities said. The 538 billion yuan excluded foreign and oil investment, according to the investment promotion bureau in the region.
Much of the investment came from 19 provincial-level regions, which injected a total of 344 billion yuan in more than 2,650 projects in 2017, an increase of 23% from a year ago. The investment has greatly driven the development of labour-intensive industries such as textiles, electronics, agricultural products as well as tourism and cultural services in Xinjiang. Xinjiang has also published a series of preferential policies to attract private investment, which registered a yearly growth of 17% last year. Local authorities said this year Xinjiang will concentrate on attracting capital in the financial sector to encourage more banks, securities and insurance companies to invest in the region.
Xinjiang to be the hub of textile and apparel manufacturing in China by 2030
The Chinese government is planning Xinjiang as the hotbed of textile and apparel manufacturing. It is expected that China's northwest region will become the country's largest textile production base by 2030, with a clear focus on sustainable development and intelligent manufacturing.
China is planning investments to the tune of 56.24 billion yuan (US$ 8.43 billion) in setting up Korla economic and technological development zone in Xinjiang Uygur autonomous region. Over 95% of these investments are towards the development of the textile and clothing manufacturing capacity in the area. The government's blueprint is to build a textile and garment city, to transform the local cotton resource advantages into economic advantages.
Here are some of the government's investment plans for Xinjiang:
- The Korla Economic and Technical Development Zone is being set up with the objective of green, clean, intelligent manufacturing
- The zone will have a 50,000 ton polyurethane fibre (spandex) project, with an investment of 3 billion yuan
- 1 million meters of digital printing project, with an investment of 50 million yuan
- 200 shuttleless loom project with an investment of 10 billion yuan
- 1200 circular knitting machine project to produce 85000 tonnes of high-grade fabric with an investment of 500 million yuan. Expected revenue will be 3 billion yuan, with a payback period of 4-5 years.
- 3 printing and processing projects – a 60000 ton knitted fabric dyeing and post-processing plant; a 20000 tonne Tong yarn dyeing and post processing project; and a 800 million meters fabric dyeing and post-processing plant. This will be at an investment of 1.75 billion yuan. This will include million sets of bedding every year, with an annual value of 1.35 billion; 7.5 million meters of curtain fabric, valued at 150 million yuan. Annual sales income is expected to be 147.75 million yuan. The products will be mainly for the Xinjiang and the international markets in Middle and West Asia.
- 27000 tons of nonwoven project with an investment of 900 million yuan. The applications will be mainly in medical, agricultural and construction.
- 250 million yuan project of processing 2 million square meters of tufted jacquard and handmade carpets, annually
- A 1.5 billion yuan project to produce 150 million pieces of woven apparel for premium brands. This will include 50 million pieces of casualwear for leading brands, 30 million branded shirts, 20 million pieces of national costumes. It also includes 40 million pieces of branded womenswear and 10 million pieces of children's wear, again for premium brands.
- 800 million yuan project for manufacturing 50 million pieces of premium brand knitwear, including 40 million pieces of knitted garments (Tshirts, underwear, bras), and 10 million pieces of high-grade sweater, annually.
- 620 million yuan project to manufacture 100000 tons of PET annually
- 21.8 billion yuan project to manufacture 1 million tonnes of ethylene propylene project annually.
- 380 million yuan project to manufacture 100000 tonnes of urea formaldehyde resins
- 4 billion yuan project to manufacture 200000 tonnes of caprolactum per annum
- Annual output of 100000 tonnes of DMC with an investment of 6 billion yuan
- Setting up a logistics centre of household textile products with an investment of 150 million yuan.
- A logistics distribution project with an investment of 200 million yuan will include among others a distribution centre and regional freight loading and warehousing logistics base.
- 200-500 million yuan project to produce cotton textile equipment and accessories
- 150 million yuan investment to construct clothing industrial park and public service information which will include training facilities, public information technology platform, promotion of industry technical standards.
While these are ambitious plans, there is skeptism about the success of the project due to a short supply of water, power, labour, in the region. However, China's largest textile company, Jinsheng Group doesn't think so. The company has set up a large cotton yarn manufacturing base in Korla. How big you ask? 1.08 million spindle facility built over the last 16 months. With a commitment to go green, the company uses Better Cotton. "We are developing and using processes for dyeing textiles with natural plants and herbs. Recycling is another area that we are investing in. Today, globally, around 15-20% of textiles are recycled. In China, it is less than 3%. Jinsheng wants to change this. Our focus is on intelligent + high end + energy efficient manufacturing," informed Pan Xueping, Chairman, Jinsheng Group.
The Youngor cotton spinning factory is one of the biggest employers in Aksu, Xinjiang. Youngor, one of China's largest shirt makers, opened the plant in 2011 to be closer to the main cotton growing region in Xinjiang. The Chinese government plans to create over a million jobs in Xinjiang region by 2023. "We must promote employment as a permanent cure to maintain social stability & achieve long-lasting peace, and particularly solve the unemployment problem for peoples in southern Xinjiang," a 2014 official document stated in outlining a massive expansion of Xinjiang's textile industry.
Almost all of the 520 employees at the Youngor factory are Uighurs. The average factory floor salary is around 3,000 yuan ($463.18) a month, and comes with food and lodging – compared with roughly 4,000 yuan for textile workers in the southern China factory belt. Yarn maker Huafu Top Dyed Melange Yarn is already at work on a 5 billion yuan plant outside Aksu. Texhong Textile Group Ltd, one of China's top spinners, is targeting a 1 million spindle project in the region.
However, the arid region is not attracting the downstream industries, despite the government's promises to provide water and waste water treatment facilities. So dyeing, processing and other water intensive textile sectors could continue to remain in Guangdong and other water safe regions of China. Xinjiang's location, more than 4,000 km from Shanghai in the east or Guangzhou to the south, is also a hurdle for companies rushing to meet tight deadlines for overseas clients.
Notwithstanding, Xi has said he hopes to increase trade with over 40 countries to US$ 2.5 trillion within a decade. Xinjiang is at the heart of the new silk road into Central Asia.
China-Europe trains connect Xinjiang to world
China-Europe freight trains that set off from Urumqi, capital of northwest China's Xinjiang Uygur Autonomous Region, made a total of 1,164 trips in 2017, according to government statistics. Urumqi, which saw the start of the first China-Europe train in May 2016, now launches three such trains on a daily basis. The trains can reach five Central Asian countries and 17 European countries.
"Compared to road transport, the trains are much faster and can help save costs for the companies," said Zhang Haixia, chief operating officer with Xinjiang Hongyunda international freight transport agency. Companies have been delivering equipment and other goods to Russia and Ukraine by China-Europe trains. Urumqi plans to send 1400 China-Europe trains in 2018.
Initiated in March 2011, the China-Europe express freight train service has seen steady expansion during the past few years. Nationwide, a total of 3,673 trips were made last year, exceeding the total launched during the previous six years.
Due to streamlined procedures and better communication with railway authorities in other countries, the transportation time for China-Europe trains has been shortened and departure frequency has increased, according to government agencies. Last year, 70% of China-Europe trains exited China from Xinjiang.
New China-Europe freight train route launched
Xinjiang and Kazakhstan jointly launched a new rail-ship route to better connect China with Central Asia, West Asia and Europe.
The train will travel through Xinjiang's Alataw Pass and stop at a port in Kazakhstan where the containers will be transferred to ships which are bound for Baku, capital of Azerbaijan. According to the Xinjiang railway bureau, the 4,186-kilometer journey will take eight days, less than one-third of travel time via rail alone. "The rail-ship route can save logistics time and increase the added value of our export products," said Liu Chang, general manager of a Shanghai-based global trade company.
Yet even in trade the BRI's impact is emerging. China's trade with BRI countries in the first half of 2017 rose 4% faster than China's overall foreign trade. Standouts include Russia, Pakistan, Poland and Kazakhstan – all key players along the new Silk Road.
Imports to northwest China's Xinjiang Uygur Autonomous Region surpassed US$ 2.9 billion in 2017, up more than 42% year on year. The region's foreign trade grew by 17% from 2016 to US$ 20.7 billion last year, including exports worth US$ 17.7 billion, according to Urumqi customs. Xinjiang mainly exports mechanical and electrical products, textiles and shoes, while importing farm produce and resource products. The region's trade with Mongolia, Pakistan and Kazakhstan along the Belt and Road recorded robust growth, increasing by 84%, 60% and 49% year on year respectively.
First stop – Kazakhstan
Kazakshtan is an important first stop in the BRI. Wedged between Russia and China, larger than western Europe but with roughly the same population (18 million) as the Netherlands, its experience since 1989 has been closely watched as a barometer for Central Asia. The US$ 184 billion economy boasts of a GDP per capita of over US$ 9224, which is slated to go beyond US$ 12,225 by 2022. The country's poverty rate declined by more than 50% between 1999 and 2004. Between 2004 and 2013, the nation's GDP increased by more than 500%. Nevertheless, nearly half of the country is considered to be in a low income class. Roughly 47% of the population maintains a monthly income of approximately US$ 70. And employment levels have not matched the nation's economic growth. Commendably, between 1998 and 2003, the number of people living in poverty in the country fell from 5 million to 3 million. The economy of Kazakhstan continues to grow at a rate 3.5-4% annually, as the government takes serious steps to improve the business climate in the country, easing reforms and procedures, and working towards privatisation, diversification, globalisation, liberalisation, to make it more of a market economy. Kazakhstan's pitch to investors is that by setting up shop in the country, they will benefit from local support and reforms while enjoying free access to the Eurasian Economic Union's other 165 million consumers. Kazakhstan and China recently signed deals worth US$ 8 billion.
The Kazakh consumer
At the pinnacle of Kazakhstan's consumer market, the number of high-net-worth individuals (HNWIs) is forecast to increase by 81% in the coming decade, according to The 2013 Wealth Report by Knight Frank Research. The number of people with (reported) assets of over US$ 30 million will reach 244 by 2022. For comparison, this means upstart Kazakhstan will soon have more than one-third as many uber-wealthy citizens as Austria. Meanwhile, Euromonitor estimates that over the past five years, the number of affluent households in Kazakhstan (those with annual disposable incomes of over $75,000) has already more than doubled from 55,900 in 2007 to 116,800 in 2012. And as incomes rise, so does the demand for luxury fashion. Kazakhstan's affluent consumer today travels to Dubai and Europe to buy the latest in luxury fashion.
The entry of sought after luxury brands like Hermes, Chanel, Prada in 2011 and 2012 signalled that the Kazakhstan retail market was reaching a new level. Of course, prices are still very high as the items attract a duty of 30-40%. The Kazakhstan apparel market is estimated to be worth over US$ 8 billion. And while the affluent seek the latest in international fashion, there is an equally large mass market in the country. This market is serviced largely by Chinese low cost apparel. Kazakhstan does not have its own textile and apparel industry.
Kazakhstan imports apparel from Russia, Turkey, China, Bangladesh
In 2016, Kazakhstan imported textiles and clothing worth US$ 708 million. Main items of import included woven & knit apparel, floor coverings, synthetic textiles, technical textiles.
Russia and Turkey are the main suppliers of textiles and technical textiles to Kazakhstan, with China close on the heels. Italy, with some of the other European countries also enjoy a 3-5% share of the Kazakhstan demand. However, the country's imports have been steadily declining since 2014. Bangladesh is well-entrenched in this market, enjoying a share of 7-8%. India accounts for 1-2% of Kazakhstan's textile and clothing imports. According to statistics compiled by World Richest Countries, one of Kazakhstan's fastest growing imports was of silk. Again, China, Turkey, Russia, Italy are important suppliers here. A fully operational Silk Route will further improve interregional connectivity. Kazakhstan will gradually emerge to be a market for high value apparel, from the fashion centres of Europe. China will obviously remain an important trade partner. Bangladesh has been able to gain leverage in this market due to its low costs. Bangladesh, by using the Silk Road, should be able to continue to grow its footprint in this market. Surprisingly, India has not been able to find a niche here. That said, UAE has emerged among the top markets for India, and there is a possibility that a lot of apparel is meant for Central Asia from the Middle East. It is expected that as Kazakhstan's fashion retail landscape matures, it will attract consumers from the neighbouring countries who now prefer to shop in the Middle East and Europe.
Khorgos, Horgos are becoming populous cities
The International Centre of Boundary Cooperation (ICBC), the adjacent Khorgos Eastern Gate Special Economic Zone and Khorgos Gateway dry port are estimated to attract 30,000 workers and their families, while the new city of Horgos on the Chinese side is being built for 200,000 people.
ICBC is a cross-border, tax-free commercial zone, a hub for entertainment and inter-cultural exchange, a place where merchants and travelers from across China, Central Asia, Russia, Turkey, and Europe could meet in the middle and stay for 30 days visa-free – a modern caravanserai. At present, 10,000 visitors from China and 3,000 visitors from Kazakhstan are currently coming into the ICBC each day – which is up from the 1,500 daily visitors some years ago. Another long-term aim of the ICBC is to become a place where visitors don't only come to buy more or less utilitarian items at a cheaper price but also the luxury items that are trending throughout Asia.
However, import restrictions of both the Eurasian Economic Union and China hamper their sales volumes. Visitors can only take 50 kilos or 1,500 euros worth of merchandise tax-free per month out of the ICBC and into Kazakhstan, while China has an 8,000 yuan (US$1,250) daily limit.
Kazakhstan will bring down import tariffs
The limits will change over the years. Kazakhstan officially entered into a Customs Union with Russia and Belarus on July 1, 2010.
As a condition of membership in the Customs Union, Kazakhstan had to double its average import tariff and introduced annual tariff-rate quotas (TRQs) on various items. However, in accordance with its WTO commitments, Kazakhstan will now gradually lower 3,512 import tariff rates to an average of 6.1% by 2020. Starting from January 2016, Kazakhstan has applied a lower-than-Customs Union Tariff rate to many commodities. On May 29, 2014 Kazakhstan and its Customs Union partners signed a treaty to create a common economic space known as the Eurasian Economic Union (EAEU). The EAEU is expected to further integrate their economies, and provide for the free movement of services, capital and labour within their common territory. The government of Kazakhstan has asserted that EAEU agreements comply with WTO standards. Kazakhstan's government is optimistic that further integration within the EAEU will make Kazakhstan more attractive for foreign investment by expanding market access to those countries.
Kazakhstan is a signatory of the Free Trade Agreement with CIS countries. In addition, as a member of the EAEU, Kazakhstan is party to the Free Trade Agreement between the EAEU and Vietnam.
Focus on infrastructure, easing investment climate
Kazakhstan has invested up to US$ 30 billion in the development of transport infrastructure, logistics assets and competencies over the past 10 years. During this period, more than 2,000 km of railways were built, 6,300 km of roads were reconstructed, the port capacities in the Caspian were increased up to 26 million tons, and the runways at 15 airports were reconstructed.
From 2011 to 2017, Kazakhstan's position on the 'Quality of Infrastructure' indicator in the Global Competitiveness Index of the World Economic Forum improved by 14 points. From 2014 to 2016, in the World Bank's Logistics Performance Index, the country climbed from the 88th to the 77th place. According to the state programme Nurly Zhol, in 2020 Kazakhstan plans to take the 40th place.
According to government officials, "An increase (compared to 2016) in the annual volume of transit traffic by 7 times, revenues from transit – by 5.5 times up to $4 billion per year, and the volume of cargo, transported through the territory of Kazakhstan, up to 2 million containers per year are among the main tasks for the period until 2020."
Kazakhstan has improved its position in the Index of Economic Freedom-2018, compiled by the US influential think tank The Heritage Foundation. Kazakhstan's economic freedom score is 69.1, making its economy the 41st freest in the 2018 Index among 173 countries. The country left behind Russia (107th place) and China (110th). This year Kazakhstan took the 11th place among 43 countries of the Asia-Pacific region and its index of economic freedom exceeds the average regional and world levels. The Heritage Foundation placed the Hong Kong as the territory with the freest economy in the world. Singapore was ranked second and New Zealand the third.