Pakistan’s deepening relationship with China
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.
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’
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