Mongolia’s Place in China’s Periphery Diplomacy

Under President Xi Jinping, the People’s Republic of China (PRC) has reprioritized the country’s peripheral relations within its larger foreign policy portfolio. This marks a break with foreign policy since Deng Xiaoping, which placed a decided premium on great power relations, particularly with the United States, to ensure China’s growth and security.¹ While the Xi administration continues to view great power relations as critical to China’s foreign policy strategy, the elevation of peripheral relations as a top priority is a paradigm shift that suggests China is working to consolidate its position in Asia, in line with millennia long practices.² To support this shift, it developed the One Belt, One Road (OBOR) grand strategy in 2013, which focuses first and foremost on the establishment of linkages between China and its peripheral states. China seeks to use OBOR to establish more robust policy, facilities, trade, financial, and social ties with its peripheral partners that ensure greater connectivity, greater interdependence, and a shared “destiny” with neighboring states.³

For the small, underdeveloped states on China’s borders, the new approach to periphery relations has the potential to fundamentally transform their domestic situations. Greater engagement and connectivity with China, for instance, translates into more opportunity for many underdeveloped neighbors; opportunity these same states would otherwise not have; however, involvement with China carries a certain degree of risk for these states, as China’s influence can have negative spillover effects on issues ranging from governance to economic stability. For many states, effectively managing the engagement with China is a top domestic and foreign policy challenge, now growing as China seeks to deepen its periphery relations through OBOR engagement. 

Nowhere is this dynamic between China’s peripheral engagement strategy and a small state’s domestic development situation clearer than in Mongolia. The two states’ engagement has increased at pace, largely in line with China’s OBOR strategy to facilitate linkages between its domestic institutions and those of its peripheral states. Mongolia has clearly benefited from greater Chinese attention and support. Closer engagement has not, however, been cost free. 
This article outlines China’s approach to peripheral relations under the Xi administration and considers the implications for Mongolia; a state China has identified as a key partner in OBOR and an “artery” in China’s overall regional diplomacy.⁴ As such, the article contributes to larger discussions of contemporary Chinese foreign policy, to a better understanding of China’s effect on smaller Asian states, and to discussions on regional order in Asia.      

China’s Peripheral Relations and One Belt, One Road

The Xi administration has regularly highlighted the importance of periphery diplomacy for China in the state’s principal foreign policy discussion forums. In October 2013, for instance, the Communist Party of China (CPC) held an unprecedented work forum, where senior leaders collectively raised periphery relations as central to China’s domestic stability and growth.⁵ In November 2014, the CPC held its fourth Central Conference on Work Relating to Foreign Affairs where Xi again stressed the importance of periphery relations in responding to a changing global environment.⁶ Xi also used the conference as a platform to call on peripheral states to establish a “community of common destiny,” with China at its center. Prime Minister Li Keqiang similarly highlighted China’s growing focus on peripheral relations in a 2014 speech to the Bo’ao Forum, equating the concept with regional stability and security.⁷

Senior officials have also repeatedly raised the importance of periphery diplomacy during travel within the Asian region. By the end of 2015 Xi and Li had travelled to over 14 neighboring states to demonstrate the state’s prioritization of its peripheral relations and to elicit their cooperation.⁸ Specialists such as Yan Xuetong have argued that these developments show that China under the Xi administration has reformulated its foreign policy thinking away from the “great powers are key, periphery relations are important” (大国是关键、周边是首要) paradigm toward a strategic conception where periphery relations are valued above great power relations.⁹

Parallel to the strategic refocus on peripheral state relations, the administration developed the OBOR grand strategy in 2013 as a policy directive aimed foremost at cementing peripheral relations.¹⁰ While OBOR remains a fluid concept, it most fundamentally consists of a collection of institutions best summarized as “two belts, three banks, three corridors, and two free trade agreements (FTAs).”¹¹ The two belts are the Silk Road Economic Belt (concentrated on Northeast and Central Asia) and the Twenty-first Century New Maritime Silk Road (concentrated on Southeast Asia). The three banks are China’s new Asian Infrastructure Investment Bank (AIIB), the Silk Road Fund, and the New Development Bank headquartered in Shanghai. The three corridors are the China-Pakistan economic corridor, the China-Mongolia-Russia economic corridor, and the China-Myanmar-India-Bangladesh economic corridor. The two proposed FTAs are the China-ASEAN FTA and the China-Japan-South Korea FTA. OBOR’s basic institutions are entirely in line with the Xi administration’s reprioritization of periphery relations both in scope and geographic focus. 

The administration first presented OBOR to establish win-win policy linkages with neighboring states.¹² The National Development and Reform Commission—the lead agency for OBOR— has called on peripheral states to engage within the framework to establish greater government-to-government ties, to coordinate on macro-level policy decisions, to develop deeper political trust, and to develop mechanisms for cooperative consensus.¹³ China has also proposed that periphery states cooperate under OBOR to link their economic development strategies and policies and to ensure pragmatic cooperation on large-scale project development.¹⁴

China has also proposed facilities linkages with neighboring states within the OBOR framework, arguing the need for greater physical interconnectedness and interoperability to achieve optimal win-win outcomes.¹⁵ This includes construction of: transportation nodes within China’s neighboring states, fast track customs ports to facilitate trade between states, maritime and air shipping routes, cross-border optic cables and sea cables, and deep harbors. China has pledged to use OBOR to finance and facilitate construction of a “transportation web” linking it to the rest of Asia, while assuring its OBOR partner states that facilities linkages will be mutually beneficial and undertaken in line with their domestic infrastructure needs.

China also intends to use OBOR to expand mutually beneficial free trade linkages.¹⁶ To support free trade, it has proposed streamlining customs, lowering trade/customs costs, sharing information on trade and intelligence on smuggling, and improving supply chain security.  China has also suggested expanding e-commerce with its neighboring states and undertaking joint research and development, offering to finance and construct industrial clusters/complexes within them to contribute to growth in their domestic manufacturing and service sectors. Chinese officials argue that support through OBOR will help develop their economies in line with their comparative economic advantages, i.e., bilateral trade will be equitable and sustainable. 

China has also pledged to use OBOR to expand neighboring states’ access to capital.¹⁷ It has proposed to establish an Asian currency stabilization mechanism to foster bilateral currency exchange between participating states, to develop an Asian bond market, and to expand access to capital through the AIIB, the BRICS Development Bank, the Silk Road Fund, and a financial mechanism in the SCO. Officials have declared their desire to use OBOR to establish a financial risk early warning system and to increase financial oversight cooperation with these states. 

Lastly, China has stated its intention to use OBOR to establish closer ties between the people within participating states, or “popular sentiment linkages” (民心相同). To accomplish this, it has proposed expanding cultural exchanges, educational contacts, skilled-person exchanges, media cooperation, and youth exchanges with its peripheral states. Chinese officials also want to develop person-to-person exchanges on public health issues, ethnic relations, and religion.¹⁸

China’s Peripheral Diplomacy: The Mongolian Case Study

Examination of China’s bilateral relationship with Mongolia since 2013 provides insight into how its strategic focus on peripheral relations and its stated intentions through OBOR translate into outcomes at the state level. While Sino-Mongolia relations have been robust since the early 1990s, engagement between the two states has clearly deepened over the past several years in line with Beijing’s intention to use policy, facilities, trade, finance, and social linkages to better integrate China and its peripheral states. 

Policy     

In August 2014, China and Mongolia elevated their formal bilateral relationship from a strategic partnership to a comprehensive strategic partnership, in line with China’s overall efforts to raise bilateral relations with peripheral states. For Mongolia, the comprehensive strategic partnership is the highest level partnership short of a formal political and/or military alliance the state can establish. To support the elevation in relations, Xi and President Elbegdorj announced a series of policy alignments aimed at increasing linkages between the two states’ political, economic, military, and social sectors. These included, but were not limited to, the establishment of a strategic dialogue mechanism for closer coordination of foreign affairs, the development of party-to-party exchange and training, the deepening of military engagement and joint-training, the construction of a high-level mechanism for coordination between law enforcement agencies, judges, border policy, and anticorruption agencies, and engagement on counterterrorism.¹⁹

To support their new policy linkages, China and Mongolia undertook a series of high-level meetings in late 2014 and 2015. In October 2014, top Chinese legislator Zhang Dejiang and Chairman of Mongolia’s Great State Hural Zandaakhuu Enkhbold met in Beijing to sign a memorandum of understanding (MOU) to establish a formal mechanism for regular exchanges between the two political bodies.²⁰ In April 2015, deputy chief of the General Staff of the People’s Liberation Army (PLA) Lt. Gen. Wang Guanzhong and Commander of General Purpose Troops of Mongolia Radnaabazar Sukhbat discussed greater coordination between the two states’ armed forces on peacekeeping, counterterrorism, border defense, and troop training.²¹ In May 2015, the secretary of China’s Central Political and Legal Affairs Commission Meng Jianzhu and general secretary of Mongolia’s National Security Council Tsagaandari Enkhtuvshin met in Beijing to sign an MOU on bilateral law enforcement cooperation focused on combating the “three evil forces” of terrorism, separatism, and extremism.²² In a November 2015 meeting in Beijing, Xi and Elbegdorj agreed to further link their policies within the comprehensive strategic partnership framework by coordinating China’s OBOR with Mongolia’s domestic development strategy, the Steppe Road Initiative. Xi stressed China’s desire to link the development strategies across the mining sector and with regard to infrastructure development and finance.²³

Trade

China and Mongolia agreed to expand trade in their 2014 comprehensive strategic partnership statement, specifically exports of natural resources to China. To support this commitment, China incorporated the Inner Mongolia Autonomous Region (IMAR) into its national integrated regional customs clearance regime, which uses a simplified customs declaration procedure to streamline imports and exports through the region, and established Erenhot as a pilot city with preferential taxation and trade policies toward Mongolia. The Xi administration then initiated two meetings with the Mongolian government in June and August of 2014 to propose a special cross-border trade zone.²⁴ Xi and Elbegdorj met in March of 2015 to sign an MOU for the establishment of a nine square kilometer cross-border trade area straddling the two states and agreed to sign a separate FTA in support of the area in the near future.²⁵ In anticipation of greater trade, the IMAR local government undertook construction of advanced port facilities in Erenhot.²⁶

China has also sought to increase trade with Mongolia through a 2015 transit agreement by which one-third of Mongolia’s exports to the country are taxed at a lower rate and given subsidized transportation costs, according to senior Mongolian officials and scholars.²⁷ As part of a broader agreement for trilateral rail development between China, Mongolia, and Russia, China pledged continued use of the Port of Tianjin for Mongolian exports abroad. For China, the benefit is a greater volume of exports to the country and increased overall trade with Mongolia.  For Mongolia, the benefits are greater competitiveness of pricing of their exports to China.  Mongolian exporters hope the transit deal will lead to greater access to the world market through Chinese ports and decreased Mongolian dependency on the single Chinese market.

More controversially, China signed a 500,000 hectare land lease agreement with the local Mongolian government in Dornod Aimag (province) in 2015 for production and export of an unspecified food crop. Still in the development phase, the plan has come under intense criticism from Mongolian academics, financial sector analysts, and policy makers who are worried China might use the lease as a means to gain control over Mongolian territory.²⁸ The Xi administration is also working with Mongolian private sector companies and the Mongolian government to develop mechanisms for inspection of Mongolian abattoirs and to lower phytosanitary trade barriers for the export of raw Mongolian meat to the IMAR.    

The two states also established an annual Sino-Mongolian Expo, which had its inaugural meeting in the IMAR in October 2015. The stated purpose is to link their development strategies through expanded trade and commercial engagement, primarily through the IMAR and Mongolia.²⁹ In separate letters presented to the participants, Xi and Elbegdorj both identified the Expo as a mechanism to deepen trade relations between the two states.   

Facilities

Following the establishment of the comprehensive strategic partnership, China announced it would develop the port at Erenhot into a world-class trade logistics hub focused on expanding trade to Mongolia. From July 2015, China also established direct flights from Erenhot to Ulaanbaatar with the purpose of facilitating more rapid trade integration.³⁰ It pledged financial and technical support for development on the Zamiin Uud side of the Sino-Mongolia cross-border trade zone in the form of container shipping and vehicle detection equipment.³¹

The Xi administration also announced in 2014 extensive development aid and concessional loans for Mongolia to develop a nationwide system of roads designed to increase trade and facilitate internal transportation in Mongolia. Key projects include the construction of a new expressway linking Ulaanbaatar to Mongolia’s new international airport, a six-lane highway (“Beijing road”), expressways in Bayankhongor and Zavkhan, and bridges and traffic stations in the capital.³²

Along with port and road development, China has committed since 2013 to develop rail lines to increase trade between the two states.  In 2013, Xi and Elbegdorj signed an MOU to explore development of rail links between China’s Ceke border crossing and Mongolia’s Shivee Kuren border crossing, China’s Ganqimaodu port and Mongolia’s Gashuun Sukhait port, China’s Zhu’engadabuqi port and Mongolia’s Bichigt port, and China’s A’ershan and Mongolia’s Dornod province.³³ China offered funding through its Development Bank with the condition that Mongolia use international gauge rails in line with China’s domestic rail system, as opposed to Mongolia’s domestic gauge, which adheres to Russian standards.  China and Mongolia both see increased rail ties as essential to expanding trade, particularly trade in natural resources from Mongolia’s southern mines such as Oyu Tolgoi and Tavan Tolgoi.     

Finance

Xi Jinping identified Mongolia’s financial sector as one of three primary areas for economic cooperation in a 2013 statement on Sino-Mongolian economic and trade relations.³⁴ Financial cooperation has proceeded in line with Xi’s intentions, both in terms of bilateral relations and as part of China’s larger OBOR approach to Asia. Bilaterally, the two states agreed in 2014 to double a 2011 currency exchange swap mechanism between the People’s Bank of China (PBOC) and Mongolia’s Central Bank to RMB 20 billion.³⁵ Mongolia has drawn an estimated USD two billion in credit to help it maintain reserve levels and to avoid a collapse of the country’s Central Bank.  While the exact terms of agreement are not public, Mongolian financial analysts suggest that interest for Mongolia’s Central Bank is set in line with the Singapore Interbank Offered Rates (SIBOR), which currently is around six percent for short-term borrowing and much higher for annualized rates.³⁶ China has become Mongolia’s principal source of foreign financial assistance.

China has also established a PBOC exploratory office in Ulaanbaatar as a first step toward establishing a PBOC branch in Mongolia, which would be the first foreign owned bank there, a prospect that has drawn significant opposition from domestic banks and some Mongolian politicians. However, this development seems likely as Mongolia’s government looks to finance small and medium company development and expand mortgage opportunities for the Mongolian people.³⁷ In 2014, Sun Weiren, China’s economic and commercial attaché to Mongolia, also noted that the Industrial and Commercial Bank of China (ICBC) was preparing to establish an exploratory presence there, noting that Chinese capital will be central to Mongolia’s future economic growth.³⁸

China has also committed to supporting Mongolia through loans from its Silk Road Infrastructure Fund and the AIIB, in which Mongolia is a founding member. In 2014, Ambassador Xing Haiming pledged unspecified aid and preferential loans through both financial bodies to support Mongolia’s Steppe Road Initiative priorities of roads, rails, pipelines (oil and natural gas), and electricity line development.³⁹ Some Mongolian government-affiliated researchers suggest that Mongolia may be the first recipient of AIIB funds of USD 200 million.⁴⁰

Lastly, Chinese foreign direct investment (FDI) to Mongolia has continued to grow, while FDI from other sources, such as Canada, Russia, and the United States, has collapsed. While overall levels have dropped over 75 percent since 2014 due to a number of domestic and international factors, Chinese investment in small and medium size projects in Mongolia increased 66.2 percent in the first nine months of 2015, largely driven by government-backed financing in support of China’s OBOR.⁴¹

Social Sectors

China has also expanded its social or person-to-person linkages with Mongolia through collaboration in education and health development. In 2013, the Confucius Institute announced funding for 200 volunteer Chinese language teachers to teach in Mongolia.⁴² They are dispersed throughout the country, including in remote provincial (aimag) capitals, small towns (sums), and villages (bags), in direct support to the comprehensive strategic partnership’s call for greater bilateral social ties. The scope and scale of China’s volunteer teacher force in Mongolia now exceeds that of the Peace Corps, which has been an important public diplomacy tool for the United States toward Mongolia since 1991.

The Chinese government has also established funding for greater university-level exchanges between Chinese and Mongolian students. In 2015, the Chinese embassy in Ulaanbaatar announced scholarships for 1,000 Mongolian students to study in China and for 150 Chinese students to study in Mongolia.⁴³ Also starting in 2015 and scheduled to continue until 2020, the Chinese government will provide funding for training in China for 500 youth, 500 military officers, and 250 reporters.⁴⁴ It has likewise committed to translate 25 prominent television programs and movies into Mongolia per year to further people-to-people exchanges. 

China also committed in 2015 to construct a handicapped children’s center and children’s hospital in Ulaanbaatar. In 2016, it has already provided Mongolian hospitals with modern electronic medical equipment for administration, diagnosis, and treatment.⁴⁵ Xing Haiming pledged greater Chinese support to Mongolia across the health domain in 2016, noting the importance of public health cooperation in overall relations and social linkages. 

Implications for Mongolia

Chinese engagement with Mongolia as part of Xi’s focus on periphery relations and OBOR has clear benefits for the country. China has increased its financial and developmental commitments at a time when other states are disengaging and/or limiting their support to Mongolia. China’s support is critical as global prices for its commodities fall and massive debt due to budget shortfalls and bond repayments have led to extreme economic difficulties in 2015/2016 that will likely worsen in 2017. From aid to assistance through the currency swap mechanism, China has emerged as an economic lifeline for Mongolia. By failing such engagement, Mongolia would be far worse off fiscally and, perhaps, politically than it is today.

Engagement has also, however, come with a price for Mongolia one cannot overlook when considering the two states’ relations. Ties with China since 2013 are affecting domestic political institutions and foreign policy relations in ways that challenge Mongolia’s long-standing commitment to democracy and multi-directional diplomacy. Some Mongolian experts suggest, for instance, that China’s reliance on elite relations to conduct foreign policy has enabled Elbegdorj to strengthen the executive branch’s role in ways that are largely unconstitutional. His approach to foreign policy, where he often acts impetuously and without prior consultation, is the most salient example of such behavior.⁴⁶ Concern in Mongolia is widespread that Elbegdorj has adopted a “China model” for leadership, consolidating power in the presidency to allow greater control over the country’s development. High-level Mongolian politicians are now calling for constitutional reform to weaken the president’s power to restore balance in political institutions. 

Similarly, Mongolian senior officials are worried about China’s growing effect on the country’s ability to maintain a “third neighbor” policy of multi-directional diplomacy. Concerns exist about the effect that trilateralism with China and Russia has on Mongolia’s room for maneuver, particularly as China is seen to dominate the trilateral framework. Analysts and officials are similarly apprehensive that trilateralism may force Mongolia to apply for permanent membership in the SCO, an institution many Mongolians are hesitant to join for fear of greater dependency on China. Similar anxiety exists over Elbegdorj’s unilateral declaration of Mongolia’s “sustainable neutrality” foreign policy, which Mongolian officials argue negatively affects the state’s relations with Russia to China’s overall benefit.⁴⁷

Financial analysts are uneasy over Mongolia’s growing debt to China under the currency swap agreement, particularly as the terms of Mongolia’s line of credit are exceedingly murky.⁴⁸ Those in Mongolia’s banking sector are upset about the PBOC and ICBC’s attempt to penetrate Mongolia’s market; some officials note that Mongolian banks cannot compete with China’s large state-owned banks in terms of capital and would face insurmountable competitive pressure from the banks. Distress also exists over China’s influence on Mongolia’s macro-level growth, as some analysts argue Mongolia is exceedingly vulnerable to changes in China’s domestic economic system, such as the country’s current attempt to rebalance its economy away from growth dependent on investment in fixed assets toward consumption-led growth. Perhaps unfairly, these analysts ascribe China’s influence as a primary factor in Mongolia’s own political system, as a force contributing to political corruption, inefficiency, and illegitimacy.⁴⁹

Security analysts are similarly concerned about the effects greater military and police cooperation with China will have on Mongolia’s national security, particularly in regard to counter-terrorism. There is a clear fear of a “Ukraine scenario” with China, where Beijing would annex territory in Mongolia’s southern and western regions out of “concern” for terrorist activity in Mongolia aimed at China. One Ministry of Foreign Affairs official noted that China had already used counter-terrorism as an excuse to detain a Mongolian diplomat on the Sino-Mongolian border in 2015 in a breach of diplomatic protocol.⁵⁰ While one can debate the likelihood of China using terrorism as an excuse to violate Mongolian sovereignty, the sense of vulnerability in Mongolia resulting from closer security cooperation with China is palpable.   

Conclusion

Given these negative or potentially negative scenarios, China’s approach to Mongolia is not unproblematic. Despite what are, arguably, Beijing’s best intentions, structural conditions exist between the two states that portend unfortunate outcomes. While a single case study in China’s larger portfolio of peripheral relations, the Sino-Mongolia case does provide insight into the challenges inherent in China’s focus on periphery diplomacy and outreach through the OBOR grand strategy. As Mongolia shares many characteristics with other small states on China’s border—a developing economy, economic dependency on China, an unstable political system, and state-society issues compromising political legitimacy—, one might expect to see similar dynamics at play within China’s bilateral periphery relations in general. 

For China, managing the negative outcomes inherent in its approach to periphery diplomacy is an increasingly pressing challenge, as failure to do so will result in diminished appetite among its partner states for closer engagement. Chinese experts have identified this need within the OBOR approach, although, to date, Beijing has largely ignored calls to slow engagement to ensure an entirely ‘win-win’ outcome for all states involved.⁵¹ Rather, it has chosen to move ahead with its periphery relations with, perhaps, the intention to deal with problems as they arise.   

This approach has significant implications for China’s position within Asia, for China’s peripheral states, and for Asia’s overall security architecture. So long as the benefits of Chinese engagement continue to overshadow negative outcomes, China’s approach to periphery relations through OBOR is sustainable for both China and partner states. The moment the negative aspects of engagement become symbolically more important than the benefits, partner states will alter their perception of China’s engagement. Should they come to view China’s approach as aggressive or exploitative, what today analysts view as a source of stability could quickly become a source of threat.