11th Kyiv Post CEO Breakfast focuses on Ukraine-China trade - Apr. 12, 2017

China is not only the world’s most populous nation, representing nearly 20 percent of humanity, it is also one of the largest investors abroad as well as one of the largest recipients of inward investment in the world.

Yet the official amount of China’s foreign direct investment in Ukraine is small, with the nation not showing up among Ukraine’s top 10 sources of foreign investment.

So, if and when Chinese investors arrive with big amounts of money, Ukraine will know that it has finally turned a corner and become an attractive place to do business. Currently, Ukraine’s cumulative foreign investment since statehood in 1991 is estimated in the vicinity of $50 billion, a per-capita figure that is far below many other nations.

How to deepen the bilateral relationship — particularly in the economic sphere — stimulated a lively two-hour discussion at the Hilton Kyiv Hotel on April 12 among 14 participants. The event, the Kyiv Post’s 11th CEO Breakfast, was sponsored by Vasil Kisil & Partners law firm.

The bilateral relationship has undeniable bright spots.

For example, China is the largest buyer Ukraine’s corn — and Ukrainian agricultural exports to China in 2016 surpassed the $1 billion mark for the first time, according to estimates by the Ukrainian Agribusiness Club — a 12-fold increase from 2012. According to the business association on April 7, sunflower oil accounts for 24 percent of the total agricultural exports, wheat 18 percent, corn 17 percent and soybeans 6 percent, with meat exports also growing.

China is also expected to soon make multibillion-dollar investments — $7 billion altogether, according to one estimate — to purchase grain, improve Ukraine’s transportation and energy infrastructure as well as develop solar power in such cities as Odesa and Mykolaiv. One of the more visible projects will be a planned $400 million passenger railway connecting Kyiv Boryspil International Airport and Kyiv. The center of the capital and the airport are separated by a distance of 35 kilometers.

Overall, according to Ukraine’s State Statistic Service, China exported $4.6 billion in goods to Ukraine in 2016. The three largest categories are: electrical machinery; nuclear reactors, boilers and machinery; and plastics and polymeric materials.

Meanwhile, while Ukraine exported only $1.9 billion to China. for a whopping $2.7 billion trade deficit. The top three categories of export: ore, grain and animal or vegetable fats and oils.

Additionally, China is now the top buyer of military equipment from Ukraine – purchasing $90 million in 2016, mainly of jet turbofan engines.

Yet another bright spot is the growth of the Chinese Commerce Association, founded in 2015, to 36 companies. And on a smaller scale, Huawei — the China-based telecommunications equipment manufacturer — is opening up a small research & development center in Kyiv this year.

On the geopolitical level, Ukraine and China say nice things about each other, but a strong suspicion persists that China is careful not to offend Russia, with whom China has more extensive trade ties, and therefore may not make large-scale investments in Ukraine as a result. There is already concrete evidence of Ukraine getting bypassed. A high-speed freight railway from London to Beijing goes through Belarus and Russia, not Ukraine. Others disagree with this assumption, saying that if Ukraine gets its house in order and creates a favorable business climate, including protecting investors’ rights through the rule of law, investment will come.

Others disagree with the assumption that China is bypassing Ukraine out of deference to Russia, arguing that if Ukraine gets its house in order and creates a more favorable business climate — one that protects investors’ rights and establishes rule of law — investment will follow. In that sense, some said, China is an equal opportunity investor.

The Kremlin has been waging a three-year war against Ukraine, aimed at destabilizing the nation — including deterring investment and economic stability that many investors, including Chinese, seek. While the West has applied economic sanctions against Russia, China has not, even though it has been verbally supportive of Ukraine’s territorial integrity and sovereignty.

Ukrainian President Petro Poroshenko last met with Chinese counterpart Xi Jinping in January at the World Economic Forum in Davos, Switzerland. There are also reports of a planned visit to China this year by Poroshenko, but no details.

The two leaders at their meeting pledged closer cooperation, a restart of an intergovernmental commission and joint participation in China’s “Silk Road” initiative. Chinese call the initiative, launched by their president in 2013, as the “One Belt, One Road” strategy, part of a branding campaign to reinforce the export-driven nation’s commitment to globalization. For Ukraine, this could mean greater interest by Chinese companies, since the nation is seen as an entry point to Europe by China.

To mark 25 years of diplomatic relations, China in January opened a photo exhibition at the Ministry of Foreign Affairs in Ukraine, attended by Chinese Ambassador to Ukraine Du Wei, who said “it showcases the historical path our countries have traveled through the wind and rain. But our governments and our peoples have always carried out a very effective cooperation for the benefit of our states.”

On April 11, the Ukraine-China magazine — published by the Kyiv-based Institute of Oriental Studies — said it is issuing a special edition devoted to the 25-year relationship. The magazine will cover the major developments in China and the relations between Ukraine and China,” Viktor Kiktenko, head of the Ukrainian Association of Sinologists, told a press conference.

The phrase “money likes silence” is sometimes applied to Chinese investors who are often not as publicity-happy as Western investors. Some Chinese investment in Ukraine is also routed through companies in other nations, so the actual amount of Chinese investment may not be reflected in official figures. Ukraine and China do not have a comprehensive free trade agreement, but have reached deals on specific issues, such as taxation, participants said.

Chinese investment is often driven from the top of the government, through state-owned firms, and often takes place on a scale — in the tens of billions of dollars — and duration — measured in decades — that dwarves investment to date in Ukraine. So it is imperative, some participants said, for Ukraine to be more active at higher levels of its government to attract such investment, which in other nations has gone for infrastructure improvements that Ukraine’s railways, highways, bridges and ports desperately need. The groundwork for large-scale investments requires skillful research, patient explanation and meticulous explanation, one participant said.

While Ukraine scores high on natural and human resources, concern was raised about the high number of young, educated people who have moved abroad and the consequences on the quality of the domestic workforce.

Yet another topic of discussion was the emergence of so-called “panda bonds,” defined by the English-language China Daily newspaper as “yuan-denominated debts sold by foreign countries and overseas agencies in China. Since their first launch in 2005, more than 30 billion yuan ($4.3 billion) worth of panda bonds have been issued from 2005 to 2016, according to data provider Dealogic. According to the World Bank’s International Finance Corp, the panda bond market is expected to surpass 320 billion yuan ($46 billion) in the next five years.” Poland last year became the first European sovereign government to issue such bonds, according to the June 22, 2016 story in the China Daily, with plans to issue $455 million in panda bonds.

Attendees at the 11th Kyiv Post CEO Breakfast on “Doing Business with China” on April 12 at the Hilton Kyiv Hotel included:

Liu Jun, Embassy of the People’s Republic of China in Ukraine, commercial advisor

Alexander Borodkin, Vasil Kisil & Partners, partner

Oleg Alyoshin, Vasil Kisil &Partners, partner

Liu Syumin, president, InterBusinessConsulting

He Jie, Cathay Associates, managing partner

Cao Lei, Cathay Associates, partner

Pascal Demko, Cathay Associates, global managing partner

Ruslan Osipenko, Chinese Commerce Association, CEO

Roman Zorin, Huawei Ukraine, head of legal department

Vyacheslav Lysenko, Ukr-China Communication president

Vladimir Osadchuk, COFCO Agri general manager