Mongolia’s Economic Recovery from COVID-19 Dependent on China

Introduction

Mongolia responded quickly to the initial outbreak of COVID-19 in China this past January. The country issued its first public health warning about the new virus and asked citizens to wear masks on January 10; shut down schools throughout the country by January 24; and began shutting down its border with China (the longest land border in the world) on January 28 (NEMA (Mongolia), various dates; Montsame, January 27) These early measures appeared to have successfully controlled the coronavirus; as of November 10, Mongolia had reported a total of 374 COVID-19 cases and zero deaths due to the virus (Montsame, November 10).

The WHO has produced a documentary touting Mongolia’s response efforts, and global experts have praised Mongolia’s successful handling of the virus even as more developed countries suffered repeated waves of infections (WHO (Youtube), November 2; FSI Stanford, May 19). At the same time, Mongolia’s pandemic control policies took a major toll on its economy, leading international organizations such as the Red Cross and the UN to declare their concerns about the impact of COVID-19 on Mongolia’s future economic development (UN, July 25; Red Cross, September 28). Following approximately a decade of positive economic growth, Mongolia’s GDP this year is set to fall by a staggering 9.7 percent (NSO (Mongolia), undated).

Early Impacts of COVID-19 on the Mongolian Economy

Amid nationwide lockdowns in January, Mongolian imports fell by 6.2 percent and exports by 24.4 percent, resulting in the country’s first trade deficit since 2014. The country’s economic slowdown was exacerbated in mid-February when Mongolia’s State Emergency Commission moved to restrict coal exports, which account for a substantial portion of Mongolia’s economy (The Ulaanbaatar Post, February 13). The mining sector had driven much of Mongolia’s double digit growth in the early 2010s, and in 2019 accounted for 25 percent of the country’s GDP and 90 percent of its total exports (Montsame, January 21).[1] China is by far Mongolia’s largest trading partner, making up 64.4 percent of total foreign trade and 89.1 percent of its total export in 2019 (Montsame, January 24).Consequently, the relative health of the Mongolian economy is closely connected with mineral sales and its trade relationship with China, both of which were dealt severe blows this year.

China was Mongolia’s top export and import partner in 2020, purchasing 68 percent of Mongolia’s total exports and supplying 35 percent of total imports from January to July. Trade with China during this period fell by 10.7 percent compared with the year before. In total, Mongolia’s total foreign trade fell by 16.7 percent during the first half of 2020 (Xinhua, August 13).

Coal

Because of COVID-19, coal exports were paused in mid-February and resumed in a limited capacity on March 31. During the first half of 2020, the volume of coal exported from Mongolia to China fell to almost half of the previous year’s numbers (Xinhua, March 31). The decline was partly caused by border restrictions, but also partly due to China’s effective moratorium on manufacturing and construction during the country’s national COVID-19 lockdowns (SCMP, March 4).

Mongolia’s own pandemic prevention protocols also hurt its mining sector. Following the declaration of a national emergency in January, new regulations lowered the number of workers allowed to work each shift and mines began working at a lower capacity.[2] The closure of transport hubs hurt the mining industry’s itinerant labor supply, further reducing mining production.

Hospitality

In the past three years, tourism has made up around 10 percent of Mongolia’s annual GDP (Montsame, May 17, 2019). Considering the country’s vast natural resources and potential for eco-tourism, the Mongolian government has focused on expanding tourism as a means of driving economic growth. Following trilateral agreements between China, Russia, and Mongolia to boost tourism in 2015, the volume of Chinese tourists to Mongolia has grown steadily. Last year, China became the largest source of foreign tourists to Mongolia, accounting for 36.4 percent of total foreign tourist arrivals (Xinhua, October 26, 2015; travel168, July 24, 2019). With foreign travel restricted under Mongolia’s COVID-19 border controls this year, hospitality and tourism revenues plummeted. Total revenue for Mongolia’s hospitality sector fell by 42.9 percent year on year in the first half of 2020 (Intellinews, July 9). According to the author’s interviews with industry members, the Mongolian tourism season usually takes place during the summer and early autumn. Tourism operators believe that they have lost their window of income for the year.[3]

Mongolia’s government has extended its national emergency status on a month-by-month basis since January, creating a perpetual state of widespread uncertainty for business owners and operators. Bat Purev, former Director General of Mongolia’s Financial Regulatory Commission of Mongolia, said that the economic situation became dire around April. Big hotels cancelled their telecom services because they had no guests, and individuals stopped paying for phone service. “Prepaid phone service, is very sensitive to personal income.” Purev explained. “So, many people just stopped paying or renewing their prepaid service. We believe it is a mirror of the health of the general economy. When things are bad, people do not spend on data plans and internet”.[4]

China’s Coronavirus Recovery

China’s economy saw a dramatic recovery in May and June after the government began lifting its nationwide COVID-19 lockdowns. While early growth was driven by pent-up demand, strong state investments in infrastructure and technology have continued to drive China’s economic recovery. Following an initial GDP contraction of 6.8 percent in the first quarter of 2020, China’s economy saw Q2 gains of 3.2 percent and Q3 gains of 4.9 percent. As the rest of the world struggled to contain the virus, China’s early successes in containing the virus allowed it to reopen comparatively early, with state-led monetary loosening and credit easing policies driving recovery particularly in the manufacturing and construction industries (SCMP, August 18). And while official government sources have avoided setting concrete GDP growth targets this year, China’s central bank governor Yi Gang predicted in mid-October that the economy would grow by about 2 percent this year (Caixin, October 19).

China’s official shift away from focusing on GDP growth targets amid the pandemic was long-expected but still surprising; the ruling Chinese Communist Party (CCP) has long tied its legitimacy to achieving strict targets for national economic growth and development. Instead of setting GDP targets, the CCP’s leadership has instead focused on creating new jobs as the economy recovers from historic labor shocks due to the pandemic (SCMP, June 7). China’s surveyed unemployment rate stood at 5.4 percent in September, marking slow but steady recovery following an unemployment high of 6.2 percent in February (Ibid., NBS, October 19).

Foreign analysts have warned that the methodology by which China’s National Bureau of Statistics (NBS) collects unemployment data overlooks rural and migrant workers who were disproportionately affected by pandemic-related lockdowns. As a result, some outsiders have raised concerns that China’s real unemployment rates may be much higher than what is officially stated—potentially as high as 20 percent (ANI, August 3). In a recent survey of China’s economic recovery from COVID-19, analysts raised particular concerns about divergence in the levels of activity reported from large and small manufacturing firms, as well as a continued drop in manufacturing employment, emphasizing the uneven nature of China’s economic recovery (SCMP, October 31).

Still, as the rest of the world economy has continued to falter, China has become one of the few drivers of global demand. Its recovery in the fall was driven by a 11.4 percent year on year increase in exports and a smaller 4 percent increase in imports. Most recently, signs of recovering consumer demand—which was especially affected by the pandemic and noticeably slower to recover than other sectors—have given analysts cautious optimism in China’s recovery from COVID-19 (SCMP, November 10).

Apart from—but also as with all things in 2020, implicitly connected to—the pandemic, China’s economy also faces a raft of other challenges which could impact its continuing growth. Some of these challenges include: ongoing U.S.-China trade tensions, including a raft of tariffs explicitly targeting the high technology industries that China is relying on to sustain its economic recovery (SCMP, May 24, 2019); a declining international reputation linked to COVID-19 and the resurgence of trade tensions with other major trade partners such as Australia (Pew Research, October 6; Caixin, September 17); and fears of food shortages following a swine flu outbreak and historic flooding in the summer (China Brief, July 29; The Standard (HK), November 10). Beef prices in particular have soared as import regimes were affected by the pandemic (YuanTalks, August 31). Fears of a winter resurgence of COVID-19 have also added to China’s economic uncertainties.

Mongolian Recovery Tied to China

China’s coal imports overall increased earlier this year amid falling fuel prices and a manufacturing and construction boom, but its imports from Mongolia fell (AmCham (Mongolia), July 30). Bat Purev, former Director General of Mongolia’s Financial Regulatory Commission, blames Mongolia’s regulatory regime for the reduction of coal exports to China, citing in particular bureaucratic delays in implementing a new green channel and border facilitation program. These policies are aimed at streamlining paperwork and quarantine requirements for goods and services passing through border controls.[4]

Purev explains, “Mongolia’s economy is very small, and the export revenue comes largely from coal and copper concentrates.” A minor adjustment to border regulations or a relatively small shift in, say, Chinese buying from Mongolia instead of Australia, would bring the economy back to normal. “It would only take a few million tons of coal and a few tens of thousands of tons of copper concentrate for us to recover.” Purev also added that “Mongolia’s total coal exports are only 10 percent of China’s demand. This means a slight improvement in the border regime could easily return us to full capacity.”[5]

Improving Mongolia’s export regime will lead to an increase in foreign currency inflows: “Mongolia is an open economy, but financially it’s like a closed economy with not much revenue capital flow,” says Bat Purev. “That is why I feel it will be easier to recover…It will be the same as we did in 2008 and 2009 global financial crisis. We experienced maybe one to two quarters decline, and recovered very quickly because of the increase in the volume of coal exports.”[6]

Conclusion

In 2008, China’s economic recovery from the global financial crisis resulted in a boom in Mongolian exports of coal and raw materials. China’s current economic recovery may provide a similar bright spot for Mongolia. It is possible that as China once again hinges its economic recovery on manufacturing and construction, it will increase demand for raw materials and fuel from Mongolia.

Additionally, Chinese food shortages this year connected to a swine flu outbreak, summer flooding, and depressed international supply chains could also create opportunities for Mongolian meat exports. China is currently the world’s largest consumer and importer of meat (DCCC, January 31), and is predicted to consume more as domestic consumption recovers.

A landmark 2016 agreement first opened up China’s meat markets to Mongolian suppliers, but persistent disease outbreaks and an inability to meet international food safety standards have hurt Mongolia’s ability to scale up its meat exports in a meaningful way.[7] In 2019, the country’s leaders expressed interest in increasing exports of non-mining sectors to China and set goals of increasing revenues from meat exports by ten-fold. (The Ulaanbaatar Post, February 22, 2018; Xinhua, May 15, 2019). If Mongolia could find a way to maintain its export standards, it could stand to benefit immensely by supplying China’s current meat shortages. Changes in regulation could boost the export of coal and meat to China and help Mongolia achieve a full economic recovery from COVID-19.

Antonio Graceffo, PhD is an economic researcher and China analyst based out of Ulaanbaatar, Mongolia.

Notes

[1] For more on how the mining sector has driven Mongolia’s economic growth and contributed to a national shift away from agriculture and pastoralism, see: Nicholas Muller, “Mongolia’s New Mining Boom,” The Diplomat, October 22, 2019, https://thediplomat.com/2019/10/mongolias-new-mining-boom/.

[2] Author’s interview with Bat Purev, former Director General of Mongolia’s Financial Regulatory Commission, on August 4, 2020.

[3] Ibid.

[4] Ibid.

[5] Ibid.

[6] Ibid.

[7] See: “Mongolia’s Trade and Investment Roadmap (2019-2023) – Strategic Response Paper,” October 2018, Ministry of Foreign Affairs of Mongolia, 22.