As America fights, China gets contracts

(MoneyWatch) In November 2007, the China Metallurgical Group Corp., a state-owned conglomerate, signed a $3 billion contract with the Afghan Ministry of Mines and Petroleum to mine copper from a barren, mountainous region southeast of Kabul.

The mine sits atop the ruins of an ancient Buddhist city in Logar Province. The area is also a Taliban stronghold. But that's not stopping the Chinese from promising what would be the largest foreign investment in Afghan history. In fact, the company has even said they will build a railroad -- the first in Afghanistan -- to the mine from Pakistan.

After a war that has cost the lives of more than 2,200 Americans and over 17,000 Afghans, not to mention a bill of upward of $642 billion, it has been China, not the United States, that may commercially conquer Afghanistan. The situation is a replay of what has happened in Iraq, where Americans have suffered 4,486 casualties. In June, the New York Times reported that, since the 2003 U.S.-led invasion, Iraq has become one of the world's top oil producers and that China has become its biggest customer, buying almost 1.5 million barrels a day, almost half of what Iraq produces.

Many Americans might wonder why, after shedding so much blood and treasure, American companies aren't able to benefit from the U.S. presence there. Reflecting the thoughts of many, Jon Stewart asked on "The Daily Show," "Don't you have to be in a war to win it?"

Why the U.S. needs China

It may seem surprising, but the U.S. needs China in Afghanistan. As America and its allies withdraw their forces and the vast amount of money supporting their involvement, fears have mounted of an economic crisis, which would lead to yet more violence. China, an ally of Pakistan and an antagonist of India, is the only nation with the power to force Pakistan to curb the Taliban factions it supports. China can also serve as a valuable counterweight in the region to Russia.

From the perspective of many Afghans as well, a strong presence by China, which along with India is a regional superpower, is a positive thing. And there are ideological sympathies as well -- not all support of communism died with the ouster of the Soviet Union.

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'We have many Afghans who are Russian communists, and we have Chinese communists, Maoists, allied with China," said a prominent Afghan journalist in Kabul who asked not to be identified. "There are Maoists in [Afghan President Hamid] Karzai's Cabinet. Keeping these people there satisfies the Chinese, and it's one reason why the Afghan government gave the contract to the Chinese."

China's commercial victories in Afghanistan are many, varied and of huge potential value. They include mineral deals such as the copper mine in Logar, and the rights to explore for oil in the Amu Darya basin, on the northern Afghan border. China National Petroleum Corp. (CNPC) began production there last October. Meanwhile, China has signed contracts to build a railroad through the Wakhan Corridor, the sliver of land northeast of Afghanistan jutting up against Xinjiang, China's far western province, through which long-haired Bactrian camel caravans once brought tea and other precious goods to Afghanistan.

In June, Chinese President Xi Jinping and President Barack Obama met in California in what President Obama called "unique" and "enormously important" talks. China is now the world's biggest trading nation -- $3.87 trillion last year alone -- quite an accomplishment for a nation whose economy is 12 times smaller than that of the U.S., on a per capita basis. 

For those Americans who feel that the U.S. and not China should benefit from these two wars, the U.S.-China Business Council, a group representing more than 200 companies doing business in China, has a simple argument: The U.S. "has a significant stake in seeing the Chinese economy grow." It argues that U.S. manufacturing, agriculture and services will grow along with China's economy and as more Chinese become affluent. China is America's third-largest market.

The bazaars in Afghanistan are filled with an array of Chinese goods, from plastic sandals to electronic gadgets -- yet there has been only $234 million in trade between the two countries. The U.S. and its allies want that to grow. They see China, which has its own Islamist problem, in Xinjiang, and with its historical ties to Afghanistan, as the only nation that can stabilize Afghanistan after they leave.

Foreign aid, domestic corruption

China, which needs energy to fuel its growing economy, is moving cautiously in Afghanistan, in part because of obvious concerns over security. The Taliban have already attacked Mes Anyak, and Chinese workers have fled. In June, then-Chinese President Hu Jintao and Karzai upgraded their ties to a strategic partnership. In September, Chinese security chief Zhou Yongkang visited Kabul, the first visit by a leading Chinese government figure in 46 years, followed by the announcement that China would train 300 Afghan police officers.

The World Bank estimates that 97 percent of Afghanistan's GDP comes from foreign aid and the money that foreigners spend locally, about $15 billion annually, a form of dependence that cannot be sustained. Meanwhile, Afghanistan's biggest export is opium. The Taliban are involved, but so are government officials. According to the CIA, in 2012 Afghanistan made $376 million -- 1/17 the value of its imports -- exporting fruit and nuts, carpets and semiprecious stones.

The U.S. and its allies are tired of the war in Afghanistan and worry that when they depart they will leave a dangerous vacuum. Property values in Kabul skyrocketed after the U.S. invasion but now are falling, and people are losing jobs. The local economy was fed by a massive wave of aid money that led to corruption. Small businesses that used to export fruit or make plastic shoes for local use collapsed as money flowed in, making the Afghani, the local currency, too strong.

"Aid inflows have become a source of rents, patronage and political power," according to a 2012 World Bank report entitled "Afghanistan in Transition."

Oil: A new Silk Road

Oil, gas and mining are the sectors that are going to lead to economic growth, and with it, the U.S. hopes, stability. In 2010, the U.S. announced that a task force headed by the Pentagon, which included the State Department, the U.S. Geological Survey and the Afghan Ministry of Mines, concluded that Afghanistan possessed $1 trillion in mineral wealth. "The Saudi Arabia of lithium," a key material in batteries and laptops, said the report. But for the U.S. to capitalize on that mineral wealth in any way, it needs China's help.

China began to move into Central Asia in the 1990s, after the fall of the Soviet Union, as did the U.S. It obtained oil and gas fields in Kazakhstan and Turkmenistan. In 2006, Chinese oil giant CNPC became the only company to win rights to a natural gas field in Turkmenistan, in great part because it promised to build a pipeline into China. It was completed in three years and runs from Turkmenistan to Beijing, Shanghai and other coastal cities. Until recently, Russia had a lock on Central Asia, but now China has entered. That's pleasing to the U.S., which has long wanted to curtail Russia's influence there.

The West tried to build a pipeline from Central Asia down through Afghanistan -- members of the Taliban even  visited Houston in 1997-- both as a way both to export the region's hydrocarbons and to reduce Russian influence. That project failed: Afghanistan was just too volatile.

Secretary of State Hillary Clinton and the Pentagon talked of a new Silk Road, an Afghan economic development program, with new roads, railroads, electric lines and pipelines connecting Europe with ports in the Arabian Sea and India. Afghanistan would be a hub, what Lord Curzon, last viceroy of British India called the "cockpit" of Asia. In that vision, China was excluded as a partner. Now, China has begun to create its own grand enterprise, succeeding in Central Asia where the West could not, and is moving into Afghanistan.

The story in Iraq is a bit different, even though, here, too, the average American would find it hard to believe that China has become, after 10 years of conflict, Iraq's biggest customer. What Americans don't realize is that the Chinese companies are state-owned and are interested only in securing fuel for its economy, not profits, which are hard to make in Iraq, where royalties, taxes and other fees take 90 percent or more of a firm's gains.

The Chinese, who have partnered with BP and Turkish Oil, have increased Iraqi oil production, and have thus helped the world economy by preventing a rise in oil costs because of U.S.- led sanctions on Iranian oil exports. With the rapid rise now in domestic oil production, the U.S. is less dependent on Middle Eastern oil, making access to Iraq less important. The U.S. may soon be exporting oil to China, helping the U.S. economy.

China as peacemaker?

As in Afghanistan, China's presence may help stabilize Iraq, which is facing a growing Shia-Sunni crisis. It may make China less dependent upon Iranian oil and interested in helping seek peace in the Middle East.

Iraq relies upon China and other countries to keep its economy going. China recently became the world's biggest oil importer, and as its economy grows, it will continue to invest in Iraq and in oil and gas fields around the world.

Chinese oil companies, unlike publicly traded majors, do not have to list oil reserves on their books to satisfy investors. They can accept contracts with a low per-barrel oil fee, without the right to future reserves.

They can also exhibit patience, sometimes born of necessity, that publicly traded companies generally can't. For example, the Logar province copper project has an added complication: Archaeologists have found hundreds of ancient Buddhist statues in Mes Anyak. The Chinese surprised many by agreeing in their contract to wait until 2014 before beginning mining operations.

"The cultural artifacts are the most important thing," officials of China Metallurgical told surprised workers on an impromptu tour of the site, according to an article in May in The Guardian.

At the same time, the Chinese contract also states that they will build a 400-megawatt power plant to run the mine, which will provide power for local citizens, a coal mine to power the plant and a smelter. Thus far they have not found any phosphates, needed in the smelting process. Afghans have demanded that the Chinese relocate its waste site, which they said could pollute a nearby river.

The only people who are happy are archaeologists. The World Bank, U.S. Embassy and others have provided money, and the Chinese the infrastructure and equipment to help them in their work. The world community feels that after the Taliban's destruction of the magnificent Buddhas of Bamiyan in March 2001 it has a second chance to save the remnants of the once great Buddhist civilization of Afghanistan, which tourists someday will come to see. Without the delay, looters would have continued to steal the exposed statues, and the weather would have ruined them.

The mine is not expected to open for five to eight years.