China and Russia drive mineral-rich Mongolia to join the mining elite

China's imports surged in August, up no less than 32pc on the same month last year. When I heard this news last week, via my mobile-phone, I was standing on a hilltop in Mongolia, watching as massive hydraulic excavators worked what is said to be the world's largest surface-mine coal seam.

Perhaps it was serendipity, but the growth of Chinese imports and the harnessing of Mongolia's mineral wealth are closely related. I know this is a departure from my usual territory of global economics, but stand by for some reportage from the frontier of capitalism.

Mongolia is in the early stages of an unprecedented boom. The economy of this former Soviet satellite is a mere $5bn (£3.2bn) – less than Jersey. In the next decade, though, Mongolia's GDP could very easily triple. That's because this vast central Asian state is the scene of an astonishing resources "land grab".

Beneath Mongolia's surface – from its mountainous north to the Gobi desert in the south – lies untold mineral wealth. The country's reserves of coal, copper, gold and uranium have lately become the talk of the world's mining industry.

Bringing you news from Ulaanbataar, Mongolia's surreal capital, seems strange I admit – given the historic importance of financial events in the West. But what's happening in this far-away state, land-locked between Russia and China, provides a vivid illustration of just how fast the global economic order is being turned on its head.

A third of Mongolia's people are nomadic or semi-nomadic – their lives revolving around horses and other livestock. Despite that, foreign direct investment has been piling in, oblivious to global recession and reaching over $700m in 2009 with billions more pledged to come. Much of this FDI since 2003 has been mining-related, with no less than two-thirds coming from China. American FDI in the same period accounted for less than 3pc of the total. British investment was a mere 1pc.

China's recent import spike has been driven by its thirst for raw materials – as Beijing has launched infrastructure projects in Western and Central China to keep the economy booming. What the wider world saw was that fast import growth meant China's trade surplus fell to $20bn in August, down from $29bn the month before.

America was quick to respond, claiming that even though China's surplus has shrunk, the yuan remains "seriously" under-valued. "Frankly, they haven't let the currency move very much so far," said Tim Geithner, US Treasury Secretary and often regarded as President Obama's chief-of-staff when it comes to blaming "Chinese currency manipulation" for America's economic woes. "They know they're just at the beginning of that process and I think we'd like to see them move quicker."

Beijing allowed the yuan to appreciate by a relatively large 0.5pc last week, taking the total increase to 1pc against the dollar since China abandoned its dollar-peg in June. What struck me, though, witnessing all this from Mongolia, wasn't so much the yuan's rise, but China's reliance on commodity imports. If Beijing does let its currency rise more in the coming months, it won't be because of US jaw-boning, but in order to obtain resources from abroad more cheaply.

Many of those resources will come from Mongolia – despite its current lack of development. The mine I visited, with its 200m tonnes of coal reserves, is just 145km from the Chinese border. Much of Mongolia's coal is the high-quality "coking" variety vital to steel production. Low "strip ratios" – the amount of waste that must be moved – means that it can be produced cheaply, for as little as $15 per tonne.

China's coal reserves, in contrast, are generally low-quality and much dearer to mine. Yet the People's Republic, in the midst of the fastest industrial revolution in human history, is producing 50pc of the world's steel. That's one reason Beijing is so interested in Mongolia coal. In addition, 75pc of China's electricity derives from coal-fired power stations.

That's why the Chinese government is a cornerstone investor in the company developing the mine I saw. Beijing has even facilitated the building of a new border post, kept open around the clock, so importing the mine's spoils is subject to minimum delay.

The extent of China's investment in Mongolia – and across the whole of Central Asia – is truly mind-boggling. Whether it's Mongolian coal and copper mines, or Kazakh oil fields, Chinese money is being sunk into every country in this resource-rich region. Beijing holds major stakes in gas fields in both Turkmenistan and Uzbekistan, for instance. Pipelines have been built going all the way back to China, a metallic version of the ancient Silk Road.

This investment is partly driven by China's paranoia – given its huge yet still escalating need for energy and other mineral resources. But as Western governments print money and prepare to inflate away their debts, China has also become determined to invest its war chest of $2,000bn-plus reserves in tangible, rather than paper assets.

Central Asia, the crucial link between the East and West of the Eurasian continent, has long been intertwined with Chinese history. Now, as I witnessed in Mongolia, this mysterious region is finally being opened up to the outside world – in large part by Chinese money looking to secure increasingly scarce resources while diversifying away from an ailing Western world.

The central Asian mega-trend, though, aside from Chinese investment, is the development of relations between China and Russia. Enemies for much of the Cold War, these two regional giants are now building serious commercial ties across their 4,300km border.

Chinese oil imports are set to reach 12.5m barrels per day by 2020, up from 4m last year. Russia, meanwhile, wants to diversify away from Western markets, not only when selling its abundant oil, but its even more abundant gas.

As such, Beijing recently signed a $25bn contract with Rosneft, under which the state-controlled Russian oil major supplies China for the next 20 years. And just a few weeks ago, a new pipeline opened that pumps eastern Siberian oil directly to China, an offshoot of a game-changing Russian crude conduit that now extends all the way to the Pacific Ocean – and so on to oil-hungry Asian markets.

Based on hydrocarbons, minerals and manufactured goods, Russia's total trade with China is now around $60bn a year, up more than five-fold since 2003. While suspicions between the two powers remain, both sides are increasingly recognising the potential to exploit the natural economic synergies that exist between them.

Neither China nor Russia sees central Asia as its exclusive back-yard. Returning from Mongolia – a place where Moscow's influence is now being combined with Beijing's cash – it seems to me that the two countries are treading carefully. Working together, they could transform this far-flung region from a collection of fragile buffer states into a transit corridor based on trade in energy and minerals and, ultimately, a whole range of goods. Slowly, but surely, that is starting to happen.

While I don't believe that Western interests will be deliberately excluded from this emerging Russia-China link-up, unlike in previous rounds of the central Asian "Great Game", they most certainly won't be in charge. As if to make the point, Beijing and Moscow last week agreed to launch ruble-yuan trading by the end of 2010, an important step towards settling their growing bi-lateral trade in national currencies – and, pointedly, not in dollars. You can see a lot from a hilltop in Mongolia – as long as you're prepared to look.