UPDATE 2-Mongolia eyes economic boost from China president's visit

Thu Aug 21, 2014 9:22am EDT

* China, Mongolia sign deals on mining, finance cooperation

* Xi tells Mongolians more cooperation will benefit both sides

* Struggling economy forces Mongolia to tilt towards China (Recasts, adds China, Mongolia proposing summit with Russia)

By Terrence Edwards and David Stanway

ULAN BATOR/BEIJING, Aug 21 (Reuters) - Chinese President Xi Jinping proposed on Thursday the expansion of bilateral trade with Mongolia to $10 billion a year by 2020 as he arrived for a two-day visit aimed at deepening economic ties between the neighbours.

Xi's arrival marks the first Chinese presidential visit in 11 years to Mongolia which has been hit by plunging commodity prices and a rapid decline in foreign investment. It is keen to agree to new deals on transport, energy and mining investment with its dominant trading partner.

The two countries signed a joint declaration upgrading their relationship to a "comprehensive strategic partnership". They also signed agreements to cooperate further in areas such as economics, energy, mining and finance.

"Xi proposes to expand China-Mongolia trade to $10 billion by 2020," China's Xinhua state news agency said.

Two-way trade was worth $324 million in 2002 but rose to $6 billion in 2013, accounting for more than half of Mongolia's total foreign trade, Xinhua said.

In an article written by Xi for Mongolian newspapers, Xi said China would do all it could to help Mongolia develop.

"China hopes that both countries can push cooperation on building inter-connecting railways and roads, the development of mines and processing," Xi wrote.

China already buys more than 90 percent of Mongolia's exports, mainly of coal and copper, and 49 percent of foreign enterprises registered in Mongolia are Chinese, Xinhua reported.

But while the focus remains on economic cooperation, persistent Mongolian worries about Chinese political hegemony in the region make a bigger breakthrough unlikely, analysts said.

"I don't think right now is the time to talk about breakthroughs in relations - the Mongolian economy is in a difficult situation but it isn't difficult enough to have any immediate impact (on relations)," said Sumati Luvsandendev, head of the Sant Maral Foundation polling organisation.

FALLING INVESTMENT

Mongolia aims to use its mineral wealth to modernise its isolated pastoral economy, but it has struggled to fund its plans. A 2012 law aimed at restricting foreign ownership in "strategic" sectors, since reversed, has also slowed foreign investment, which fell 70 percent in the first half of 2014.

Mongolia's economy grew just 5.3 percent in the first six months, slowing from 11.7 percent in 2013, official data showed.

Mongolia has previously sought to restrict Chinese firms from taking control of its assets, blocking a stake bid by state metals conglomerate Chinalco for the Mongolia-based miner SouthGobi Resources.

But slowing growth could persuade the government to allow greater Chinese involvement in its mining and infrastructure sectors, the two pillars of its long-term plans.

"Balancing Russia and China and introducing the participation of so-called third neighbours remains the broad outline of Mongolian policy," said Neil Ashdown, senior analyst with IHS Country Risk and Mongolia specialist. "What we are seeing is a lean towards China at the present time, and the clear reasons for that are the way the economy is going."

Mongolia is also keen to use China's rail network to deliver coal and other minerals to other markets, and a transhipment deal is set to be signed during Xi's visit.

"I think the most important deal we can get out of this visit is a rail transit agreement," said Bontoi Munkhdul, chief executive of the Ulan Bator-based Cover Mongolia consultancy. "Allowing rail access to seaports in China would allow us to export our commodities to other sea-borne Asian nations."

But while the deal could give Mongolia more options, analysts expect the bulk of its coal and copper exports to be sold to China for years to come.

The government in Ulan Bator has already agreed to form a joint venture with state-owned Chinese coal giant Shenhua Group to build a 13-km (8-mile) rail link that will help deliver Mongolian coal across its southern border.

During a visit to China last year, officials said a working group had been set up to build roads, railways and pipelines that would turn Mongolia into a "transit corridor" linking the Chinese and Russian economies.

China voiced support for a Mongolian proposal for a trilateral summit with Russia to increase consultation and cooperation among the three neighbours, Xinhua said.

Russia's President Vladimir Putin will visit Mongolia in September, with more cooperation deals expected. (Additional reporting by Ben Blanchard and Sui-Lee Wee in BEIJING; Editing by Nick Macfie and Robert Birsel)