Power play

Pak­istan’s deep­en­ing re­la­tion­ship with China

Financial Times USA - - FRONT PAGE - By Henny Sender and Ki­ran Stacey

The signs in the lobby of the Pearl Con­ti­nen­tal Ho­tel in La­hore could hardly be more gush­ing. “Long live Pak-China Friend­ship,” they read, ad­ver­tis­ing a con­fer­ence to pro­mote the China-Pak­istan Eco­nomic Cor­ri­dor. The ban­ners add: “Our friend­ship is higher than the Hi­malayas and deeper than the deep­est sea in the world, and sweeter than honey.”

That high, deep and sweet friend­ship is also worth a lot of money. The CPEC scheme, which will link west­ern China to the Ara­bian Sea through Pak­istan, is a cor­ner­stone of the am­bi­tious “One Belt, One Road”, a 65-na­tion strong ini­tia­tive that aims to cre­ate a mod­ern Silk Road con­nect­ing the world’s sec­ond-largest econ­omy with Cen­tral Asia, Europe and Africa.

It is the pet project of Xi Jin­ping, China’s pres­i­dent, who de­scribed the in­fra­struc­ture-driven scheme this week as “the project of the cen­tury” when he met heads of state to dis­cuss progress. On the sur­face Pak­istan is on sched­ule to be one of the largest ben­e­fi­cia­ries of Mr Xi’s am­bi­tion and ar­guably no coun­try has as much to gain. Growth in gross do­mes­tic prod­uct is run­ning at close to 5 per cent a year but it is not enough to ab­sorb the 2m to 3m peo­ple en­ter­ing the job mar­ket an­nu­ally.

“Pak­istan has not been part of the world for a long time,” says Khur­ram Dast­gir Khan, the com­merce min­is­ter. “We were in a dark bub­ble and we are only just emerg­ing. There is a fear that China will sell us cheap goods be­cause we can’t com­pete. [But] China is the only game in town.”

Such con­cerns are an ac­knowl­edg­ment that Pak­istan’s econ­omy has strug­gled, not only when com­pared with neigh­bour­ing In­dia but also against the likes of Bangladesh, which has built a large man­u­fac­tur­ing base.

Bei­jing is set to in­vest more than $55bn in its neigh­bour, build­ing power plants, roads and rail­ways to give its in­fra­struc­ture a much-needed up­grade as it seeks to emerge from years of politi­cal in­sta­bil­ity. Es­ti­mates from the Pak­istan Business Coun­cil sug­gest the projects could ac­count for 20 per cent of the coun­try’s GDP over the next five years and boost growth by about 3 per­cent­age points.

But Pak­istan’s pol­i­cy­mak­ers also hope the re­la­tion­ship — Bei­jing last month pro­vided more than $1bn in loans to help Is­lam­abad stave off a cur­rency cri­sis — will in­su­late it from the pos­si­bil­ity that China will use its in­vest­ments as a way to grab re­sources, prof­its and politi­cal power from its smaller, poorer neigh­bour.

China ac­counts for al­most two-thirds of Pak­istan’s $20bn-plus trade deficit, and in­creased ex­ports to its neigh­bour by 77 per cent in the three years be­tween 2012 and 2015 from $9.3bn to $16.5bn, which has made some scep­ti­cal of Bei­jing’s ap­proach.

“There is a scary down­side to this project,” says one business leader in Karachi, Pak­istan’s big­gest city and its business cen­tre. No one wants to speak openly against CPEC for fear of alien­at­ing gov­ern­ments on both sides of the bor­der, which have com­mit­ted sig­nif­i­cant politi­cal cap­i­tal to mak­ing it hap­pen. “There is a big neigh­bour sit­ting next door and for them we are just a prov­ince,” he adds.

Bei­jing’s pri­or­ity

The leak of China’s orig­i­nal pro­pos­als for the CPEC agree­ment in the Pak­istan news­pa­per Dawn this week height­ened fears. The terms pri­ori­tise the in­dus­trial am­bi­tions of the Xin­jiang Pro­duc­tion and Con­struc­tion Corps, a quasimil­i­tary or­gan­i­sa­tion vi­tal to Bei­jing’s oil and se­cu­rity poli­cies which also dom­i­nates the agri­cul­tural econ­omy of the fron­tier re­gion of Xin­jiang.

Com­par­ing it with the trad­ing or­gan­i­sa­tion that paved the way for Bri­tish rule in In­dia, the head of a large in­vest­ment com­pany in Pak­istan says: “We have to be care­ful if we don’t want this to turn into a re­peat of the East In­dia Com­pany. If we squan­der it, it will.”

China wants to com­plete four main tasks via CPEC: ex­pand the Gwadar port on Pak­istan’s south coast, which it fi­nanced, built and owns, build a fleet of power plants, con­struct road and rail links and set up spe­cial eco­nomic zones where com­pa­nies can en­joy tax breaks and other business in­cen­tives.

In build­ing in­fra­struc­ture, Bei­jing is do­ing for Pak­istan what Is­lam­abad has been un­able to do for it­self, es­pe­cially as far as power gen­er­a­tion is con­cerned. Peak elec­tric­ity de­mand in Pak­istan is 6 gi­gawatts greater than it can gen­er­ate — equiv­a­lent to about 12 medium-sized coal power plants. Black­outs in many parts of the coun­try last for sev­eral hours a day.

To meet this short­fall China is ex­pected to spend more than $35bn — about two-thirds of the en­tire CPEC bud­get — build­ing or help­ing to con­struct 21 power plants, which will be mainly fu­elled by coal. The com­bined 16GW of ca­pac­ity that they could pro­vide would re­pair Pak­istan’s sup­ply gap twice over.

The build­ing work as­so­ci­ated with CPEC has al­ready boosted heavy in­dus­try in the coun­try. Arif Habib, one of the coun­try’s big­gest business con­glom­er­ates, says it is tre­bling its ce­ment pro­duc­tion in an­tic­i­pa­tion of CPEC.

“China will ex­pand the [eco­nomic] pie,” says Ah­san Iqbal, Pak­istan’s plan- ning min­is­ter. “This project will cre­ate new [do­mes­tic] de­mand.”

‘China can’t let CPEC fail’

An­other at­trac­tion for Pak­istan is that China could pro­vide se­cu­rity. In a coun­try that has been plagued for years by ter­ror at­tacks, Bei­jing will want to make sure its in­vest­ments are pro­tected. Last week, at least 10 lo­cal con­trac­tors work­ing near Gwadar were killed by uniden­ti­fied gun­men.

Ex­actly what form this se­cu­rity as­sis­tance will take is un­clear. China is sell­ing bil­lions of dol­lars’ worth of de­fence equip­ment to Pak­istan and has handed over two ships to the navy to help pro­tect Gwadar port. Min­is­ters have, how­ever, de­nied re­ports that Chi­nese troops are also sta­tioned in Pak­istan.

“There is a se­cu­rity di­men­sion to CPEC,” says Mush­taq Khan, chief econ­o­mist at Bank Al­falah and a for­mer chief eco­nomic ad­viser to Pak­istan’s cen­tral bank. “It is right for the Chi­nese to se­cure and pay for Gwadar. China can’t let CPEC fail.”

For all the ben­e­fits — money, ex­per­tise and man­power — that China of­fers, many have ex­pressed con­cern about the terms of the deals and whether they might un­der­mine Pak­istan’s in­dus­try and even sovereignty.

Lo­cal and in­ter­na­tional bankers say the pro­cure­ment and bid­ding pro­ce­dures around CPEC greatly favour Bei­jing, Chi­nese com­pa­nies win­ning Chi­nese con­tracts to build and fi­nance in­fra­struc­ture in Pak­istan, in deals of­ten guar­an­teed by Is­lam­abad.

“The risk is that down the line China will call the shots and that we will pay the price later,” says Syed Mu­rad Ali Shah, the chief min­is­ter of Sindh, the prov­ince in which Karachi is lo­cated. “It is up to us.”

The Chi­nese plan, re­vealed by Dawn news­pa­per to have been de­liv­ered in De­cem­ber 2015, has only added to those con­cerns. It talks about thou­sands of acres of agri­cul­tural land leased out to Chi­nese en­ter­prises to de­velop seed va­ri­eties and ir­ri­ga­tion tech­nol­ogy. It would in­stall a full sys­tem of mon­i­tor­ing and sur­veil­lance in cities from Pe­shawar to Karachi, with 24-hour video record­ings on roads. It would build a na­tional net­work of fi­bre-op­tic ca­bles to boost in­ter­net ac­cess.

Key to this is the XPCC. Un­der the plan the Han Chi­nese eco­nomic and para­mil­i­tary or­gan­i­sa­tion is man­dated to in­vest in Pak­istan as a spring­board for eco­nomic devel­op­ment around Kash­gar, the heart­land of 11m Tur­kic­s­peak­ing Mus­lims known as Uighurs.

Min­is­ters in Is­lam­abad say the doc­u­ment con­tains pro­pos­als orig­i­nally drawn up by Bei­jing, but will not say how far the draft agree­ments, which are still be­ing ne­go­ti­ated, dif­fer from it.

Crit­ics ar­gue that Pak­istan risks re­peat­ing the mis­takes of the 2006 free­trade agree­ment with China which was set­tled on un­favourable terms for Is­lam­abad. And op­po­si­tion politi­cians have at­tacked the govern­ment for giv­ing away too much to the Chi­nese.

Asad Umar, a mem­ber of the op­po­si­tion Pak­istan Tehreek-e-In­saf party, says of the leaked Chi­nese pro­pos­als: “This is the kind of lack of se­ri­ous­ness which has re­sulted in Pak­istan los­ing rather than gain­ing from all the free­trade agree­ments we have signed.”

Across the bor­der in In­dia, which is so con­cerned about China’s am­bi­tions in Pak­istan that it boy­cotted Mr Xi’s multi­na­tional con­fer­ence in Bei­jing, the crit­i­cism has been even more damn­ing. Swara­jya, an In­dian rightwing mag­a­zine, said the leaked doc­u­ment showed China in­tended “to re­duce Pak­istan to a vas­sal state”. New Delhi is wor­ried both about Chi­nese en­croach­ment into parts of Kash­mir op­er­ated by Pak­istan, which In­dia re­gards as its own ter­ri­tory, and about the po­ten­tial for China to sta­tion navy forces at Gwadar.

In an ef­fort to re­as­sure its neigh­bours, Nawaz Sharif, Pak­istan’s prime min­is­ter, told the Bei­jing con­fer­ence: “Let me make it very clear that CPEC is an eco­nomic un­der­tak­ing open to all coun­tries in the re­gion. It has no geo­graph­i­cal bound­aries. It must not be politi­cised.”

Given the scale of the ini­tia­tive, and Bei­jing’s soft power play, it is un­likely that the ar­gu­ments will re­cede. Ac­cord­ing to Pak­istan’s Over­seas In­vestors Cham­ber of Com­merce and In­dus­try, CPEC power projects will pro­vide back­ers with an av­er­age of about 20 per cent re­turn on equity. Min­is­ters in Is­lam­abad ad­mit the re­turns might look high, but they point out that the guar­an­teed pay­ments to power pro­duc­ers are lower than cur­rent prices, and that no one else was will­ing to fi­nance the schemes.

“We wanted power in­vest­ments, but no­body came in,” says Mr Iqbal, the plan­ning min­is­ter. “The Chi­nese spot­ted an op­por­tu­nity.”

‘Money has no colour’

Oth­ers ques­tion the opaque na­ture of some of the deals. Vaqar Ahmed, deputy ex­ec­u­tive di­rec­tor at the Sus­tain­able Devel­op­ment Pol­icy In­sti­tute think­tank in Is­lam­abad, says he tried to get the de­tails of the mem­o­ran­dums of un­der­stand­ing and progress re­ports on spe­cific projects, but was blocked by the govern­ment from do­ing so.

Some of­fi­cials blame the opac­ity on pro­vin­cial ri­valry as lo­cal politi­cians spar to get more Chi­nese in­vest­ment for their dis­tricts. But oth­ers at­tribute it to the fact that the Army is in­volved on both sides of the bor­der although the ex­tent of the mil­i­tary role re­mains un­clear.

What­ever the con­cerns in Pak­istan, that Is­lam­abad is ced­ing too much power to China, many in the business and politi­cal com­mu­ni­ties ar­gue that the ben­e­fits from the in­fra­struc­ture projects are well worth it.

“Pak­istan re­quires money and money has no colour,” Kim­i­hide Ando, head of Mit­subishi Corp in Pak­istan, says.

Oth­ers ar­gue that, fol­low­ing the prob­lems with the free-trade agree­ment, Pak­istan’s min­is­ters will be more savvy this time. “The Chi­nese have taken us for a ride [be­fore] but we have let them,” says Eh­san Ma­lik, chief ex­ec­u­tive of the Pak­istan Business Coun­cil. “Given we have made huge mis­takes be­fore, hope­fully we will learn this time.”

Ad­di­tional re­port­ing by Lucy Hornby in Bei­jing

‘There is a scary down­side to this project. There is a big neigh­bour sit­ting next door and for them we are just a prov­ince’

— Fa­rooq Naeem/AFP/Getty Im­ages

Friends united: Pak­istani labour­ers pre­pare for a visit by Xi Jin­ping, China’s pres­i­dent, to Is­lam­abad in 2015. Right, a bill­board fea­tur­ing Mr Xi, his Pak­istan coun­ter­part Mam­noon Hus­sain (left) and Nawaz Sharif, the coun­try’s prime min­is­ter

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