Some say that the China-Pakistan Economic Corridor (CPEC) originated from the Karakorum Highway which was completed during the late 1970s while others consider it an echo of ancient Silk Routes. General Pervez Musharraf was the first to use the word “corridor”. For example, during his visit to China in February 2006, he offered a corridor to China to reach to the Arabian Sea for trade and energy. He repeated this offer on other occasions as well. China neither affirmed nor negated the idea. It seems that the prevailing geopolitical conditions compelled China to keep silent.
Musharraf’s offer was made during the days when the US was at the peak of its power projection in the region. It had invaded Afghanistan, Iraq and had established military bases in some Central Asian Republics—all around China’s periphery. China had not yet reached the level of power necessary to stand up to US dominance. Therefore, then Chinese President Hu Jintao, who held a cautious approach to international politics, decided to continue with Deng Xiaoping’s strategy of “bide your time”. While maintaining a low profile, on the ground, China continued work in Pakistan aimed at creating a passage to the open seas, a project far greater than what Musharraf had in mind. The construction of Gwadar Port, the Makran Coastal Highway, upgrading parts of the Karakoram Highway, roads in Gilgit-Baltistan and a feasibility study of some related projects during those days is evidence of this.
Among these strategies, the BRI has drawn world-wide attention given its extraordinary size and implications. This mega project aims at connecting China with now 69 countries from Asia, Europe, Africa and Latin America representing 40% of world GDP
When the next decade swung around, a change of power took place both in China and the world. It was clear by 2011 that protracted wars had exhausted the US and its Western allies which were looking for ways to pull out. China’s continued economic growth and military modernization made it a tangible player in global politics. By 2011, China surpassed Japan to become the second largest world economy. Next year, the 18th National Congress of the Communist Party of China (CPC) nominated Xi Jinping to lead for the next five years. It was a rare occasion that a Chinese leader assumed three core positions at the same time: the Secretary General of the CPC, the Chairman of the Central Military Commission that commands the world’s largest army of 2.3 million personnel, and President of the country. This, coupled with his “assertive” personality, led him to move away from Deng’s policy of “bide your time” and take on an active role in world affairs—a role commensurate with China’s rising status. After consolidating power, Xi introduced some new strategies such as the “China Dream” for the great rejuvenation of the Chinese nation, the “New Type of Great Power Relations” to address China’s most crucial external relation with the US, and the “One Belt One Road” (OBOR) which was later renamed the Belt and Road Initiative (BRI).
Among these strategies, the BRI has drawn worldwide attention given its extraordinary size and implications. This mega project aims at connecting China with now 69 countries from Asia, Europe, Africa and Latin America representing 40% of world GDP. The numbers are increasing. Under this programme China decided to establish six corridors with CPEC described as the “flagship” project. The other five are: the China-Mongolia-Russia Economic Corridor; the New Eurasian Land Bridge; the China-Central Asia-West Asia Economic Corridor; the Bangladesh-China-India-Myanmar Economic Corridor (BCIM); the China-Indochina Peninsula Corridor.
Importance for China
First, other corridors involve at least three countries. Arguably, the more the number of participants in a multibillion multilateral project the harder it is to reach an agreement due to divergent interests of member states. The BCIM is the most relevant example where competing interests, and the nature of the relationship among member states have blocked any major progress. Contrary to this, since CPEC involves only one country, Pakistan, with whom China has a cordial relationship, the project is moving forward. Second, CPEC works as a bridge between land and sea routes. By crossing Pakistan, China can reach the Arabian Sea and the Indian Ocean.
Third, CPEC can potentially complement the modernization and opening up of China’s Western region which, far from the wealthy coastal areas, is underdeveloped. Its Muslim majority Xinjiang Region has been facing a low-scale insurgency. Guided by its traditional philosophy of “creating stability through economic development”, in 1999, China launched a development campaign to bring the region at par with the coastal areas. A successfully established CPEC can complement ongoing Chinese efforts and help open up the Xinjiang Region and its economy to the rest of the world. Economic development, the Chinese leadership believes, can defeat separatist tendencies—a key challenge to any Chinese administration. In fact, CPEC’s potential is not confined to the progress of the Western region alone, China’s overall trade and energy can be linked to this route.
Strategically, Beijing believes that CPEC can circumvent the vulnerable choke point of the Strait of Malacca from where over 75% of its energy and trade passes. Kashgar-Gwadar is the shortest and most direct route linking China with the Arabian Sea/the Indian Ocean. Currently, around 75% of Chinese trade and energy passes from the narrow Strait of Malacca. Chinese strategists do not rule out its blockade especially under enduring South China Sea disputes and Beijing’s growing competition with regional and international rivals. Thus, even if CPEC fails to achieve the expected economic outcome, it remains an “extra option” during a crisis. An aspirant rising power needs to keep alternative options to prevent strangulation. Moreover, infrastructure (highways, rails, bridges, ports) developed for economic and trade purposes could easily be utilized for military objects if and when required.
Investment in CPEC-related projects escalated from an initial $18 billion to $46 billion during President Xi’s visit to Pakistan in April 2015. Some reports stated that this figure has swollen to $57 billion
CPEC’s culminating point is the strategically important Gwadar Port. This natural, all-weather port is close to the Iranian Chabahar Port, the Persian Gulf, Strait of Hurmuz and oil-rich Middle East. A state-run China Overseas Port Holding Company has already taken the administrative control of it for 40 years. The Port’s importance can be measured by China’s rapidly expanding maritime and trade interests, its quest for building or acquiring other ports around the world and its deepening naval cooperation with Pakistan. Some even foresee Gwadar becoming China’s naval post in the future, a probability that cannot be ruled out.
CPEC surfaced almost concurrent to the Pakistan Muslim League-N (PML-N) taking power in Pakistan. In May 2013, Chinese Premier Li Keqiang visited Pakistan and signed agreements which laid the foundation for CPEC. Li also met Nawaz Sharif who was then in line for office. Later, Nawaz flew to China on his maiden visit. He was accompanied by the chief ministers of Punjab and Balochistan, provinces governed by his party. Since then, on the Pakistani side CPEC has been handled by the PML-N government, exclusively.
In the beginning, neither CPEC nor the BRI drew any significant attention. The former appeared a moderate scale project with the ultimate aim of connecting China’s Kashgar to the Arabian Sea/Indian Ocean. CPEC’s importance grew as Chinese planners articulated the BRI scheme in which they found CPEC a crucial link. Chinese Foreign Minister Wang Yi said it was: “The first movement of the symphony of the Belt and Road Initiative.” As a result, investment in CPEC-related projects escalated from an initial $18 billion to $46 billion during President Xi’s visit to Pakistan in April 2015. Some reports stated that this figure has swollen to $57 billion.
CPEC is directly linked to the development of BRI, the brainchild of Xi Jinping. In Fall 2017, the National Congress of the CPC is likely to nominate him for another five-year term ending in 2022. Until this period at least, the BRI is likely to remain at the centre of China’s strategy; CPEC is likely to retain its significance. If that is the case, it is likely to increase both Chinese influence and investment in Pakistan in the years to come. According to some quarters, if the implementation of the project on the Pakistani side moves forward according to Chinese desires, the investment/loan figure may cross into the billions.
Pakistan’s internal controversies
In spite of its importance, the project faced resistance and criticism in Pakistan. Two aspects in particular merit swift attention. First, the government’s attempts to use the project for political purposes. Second, the government received an unprecedented number of loans, most of them on unfavourable terms. Despite the fact that CPEC is a commercial and business venture, the government has kept both the public and parliament in the dark.
CPEC was planned by China well before the PML-N’s assumption of power. It is coincidence that both emerged at the same time. The government has tried to give the impression that the project is its product. On many occasions when CPEC was discussed, the prime minister was accompanied by his younger brother, the Punjab chief minister, or by party loyalists. Voices from the small provinces accused Punjab of prioritizing funds for itself. A glaring example is the Lahore Orange Line being developed with a hefty $1.65 billion, all taken from CPEC funds. Not only this, to prevent escalating costs, the Economic Coordination Council granted an additional Rs200 million in tax exemptions for the Chinese company on imported machinery for the Orange Line. Punjab was also accused of using funds for visits, student exchanges, giving priority to projects that would politically benefit the ruling party. These developments fanned grievances in provinces that lagged behind. Some even began to call CPEC the “China-Punjab Economic Corridor”. These issues created an atmosphere of accusations, threats, boycotts and protests. All of this could have been avoided had the government acted fairly and wisely.
Amid this, a controversy over the route engulfed the project. Three routes were identified to connect Kashgar with Gwadar Port: western, central and eastern. The western route, which passed from KP and Balochistan was shorter and cheaper to develop, should have been preferred. As demand grows, other economically feasible routes could be developed. Apparently, because of political reasons, the government preferred the eastern route which passed its political constituencies, especially Lahore. The government also tried to generate the impression that the eastern route was China’s preference even though there was no such thing. By the time consensus was reached to develop the western route as a priority, the controversy had done considerable damage.
It is encouraging to note that both the government and opposition from the provinces have shown flexibility in their stances and have accommodated each other. The government realized it could not take the entire pie and thus decided to share it with other stakeholders. For example, the government agreed to develop the western route on priority. It also agreed to build mass transit rail systems, similar to the Orange Line, for all provincial capitals. As chief ministers received projects which they could showcase to their voters as their achievements, they stopped boycotts and protests and began to participate in CPEC-related meetings. All of them attended the sixth session of the JCC held in December 2016 and accompanied the prime minister to attend the BRI Forum in May 2017, both in Beijing.
The issues were important, but not central to CPEC and China-Pakistan relations. They were linked to uneven distribution of resources within the Pakistani system. It augurs well that many of them have been settled.
Loans and repayments
What matters instead are the nature of the loans, terms and conditions of the agreements and the repayment methods. How much of the promised Chinese money is coming as commercial debt, investor equity, soft loans or grants? Pakistan has signed the largest deals of its history but they have never been made public, or presented in parliament for debate. The government has discussed some secondary topics with some closed circles but has not touched on the central issue. Poorly managed websites of the Ministry of Planning, Development & Reforms and newly developed ones on CPEC and the Pakistan Board of Investment are silent on the central question of the terms and conditions of loans. Absence of details has led to a series of speculation, accusations, counter accusations. Dawn’s expose on CPEC’s documents and the Daily Times “counter” story are an indication of, and add to the confusion. This all can be stopped if the government came forward and explained the details of those loans.
Instead, some geniuses in government decided to respond by labelling those who raised questions about the ambiguity and duplicity of the agreements as cynics playing into the hands of the enemy. An environment has been created in which even a legitimate question on the handling of CPEC is spun as anti-CPEC (and for that matter anti-China). As a result, some leaders had to scramble to clarify to China that these questions were about the government’s handling of the project; they were neither against CPEC nor against China-Pakistan relations. The government has thus turned CPEC into a holy cow. The people of Pakistan nevertheless, have a legitimate right to question the unprecedented loans which will have a direct impact on future generations.
Concessions to China
The available literature provides a confused picture about the terms and conditions of CPEC loans. Though loans differ from agreement to agreement, at a broader level there are two types here—one signed between the two governments and the other commercial loans or those under the pattern of foreign direct investment. The interest rate on the former is usually low. However, loans in this category are barely one-third of the total borrowed. While addressing critics, the government spokespersons only refer to this category. The lion’s share of the loans falls under foreign direct investment schemes which demand the guarantee of 17% return in fixed dollar terms. It is also speculated that on some contracts Chinese banks have added additional insurance surcharges under country risk assessment to secure their investment. According to some estimates, once commercial operations start Pakistan’s annual dues in terms of debt return will exceed $3.546 billion per year.
The government is also accused of granting out-of-the-way concessions to Chinese bidders. It is also reported that agreements signed under CPEC bind the government into awarding all projects to Chinese contractors but Chinese companies are not bound to involve local companies, hire local labour and use local raw material. (However, for some time now they have started hiring locals on a moderate scale and the trend might increase as Pakistani labour acquires the skills and working style required by Chinese managers. One must admit that Chinese labour is extremely focused and hardworking). As reported, and the government has not given a rebuttal, only Chinese companies will be allowed to invest in the proposed Economic Zones. If these reports are correct, these conditions are against competition, will monopolize Chinese investors, making the Economic Zones small Chinese “enclaves”.
It is also reported that the government has granted heftier tax concessions to Chinese investors, which are not available to even local manufacturers. For example, Chinese companies enjoy a lifetime waiver on corporate tax payments on all CPEC-related energy projects. Such measures have already cost the country, as is being reported in the national press, to the tune of Rs180 billion to Rs200 billion.
Additionally, the PML-N government has agreed to bear the cost of a Special Security Division of 15,000 personal raised to protect Chinese companies and entities entering under CPEC. As reported, the government first tried to recover it by adding one percent to the power bill for the entire span of 25 to 30 years. After NEPRA rejected this, the burden was put on the provinces by reducing the divisible pool by three percent under the next National Finance Commission award.
Reports in the media state that the condition of an upward revision has also been included in the framework of deals with China. Most often project costs escalate due to perpetual red-tape, corruption and political conditions. Chinese companies now have the right to review those projects whose cost changes. Under this condition, as reported, the 392km Multan-Sukkur section of the Lahore-Karachi Motorway, the 120km Havelian-Thakot road project and construction of allied infrastructure in the Mullah Band area of Gwadar, at a price of 4.4 billion dollars, were revised. There are also ‘hidden’ costs which will surface later.
Who is responsible? Have Chinese companies forced Pakistani authorities to accept their terms and conditions? Certainly not. These agreements materialized over a long period of time, giving each side sufficient time to ponder each and every clause, time to consult experts and prepare feasibility studies if necessary. Yet, if uneven conditions are imposed on us the onus entirely lies on those who are drafting and signing these loans on the Pakistani side. All companies and corporates are fiercely profit-driven, be they Chinese, Pakistani or from any other country. They aim at extracting maximum profits and benefits. It is naïve to expect them to put Pakistan’s interests first. That is the job of our rulers.
The government has signed up for an unprecedented number of loans from a single country at a time when our foreign reserves are at their lowest levels and our external debt is Rs18 trillion, making this a move full of risks. Accumulated foreign debt, from Western financial institutions and now from China, will strangulate Pakistan’s strategic options, bringing lender influence into every segment of state and society. Once the incumbent government signs the agreements (which it has probably already done) the country will be legally bound to honour them. Forget writing off loans, China doesn’t even have a tradition of reviewing them. It would be naive to think that given the level of this investment and the Chinese diaspora, China will ever sit on the sides and watch what will happen in Pakistan without stepping in if it deems fit. To protect its many interests, Beijing is, most likely, going to review its non-interference policy and take a more active stance in the future.
To us this is not worrisome. Chinese investors or a diaspora (in fact from any other country) are welcome. This will break our so-called isolation, and may even help turn our homogeneous society into a multicultural, heterogeneous one. What we only stress to our politicians is that these floodgates be opened with complete transparency. Any uneven growth may benefit some individuals but will harm the long-term relationship between the two countries.
CPEC is directly linked to the development of BRI, the brainchild of Xi Jinping. In Fall 2017, the National Congress of the CPC is likely to nominate him for another five-year term ending in 2022. Until this period at least, the BRI is likely to remain at the centre of China’s strategy
Informed quarters are aware that it was not investment or trade that consolidated the China-Pakistan relationship in previous decades. By the launch of CPEC in 2013, China was hardly among the top 15 investors in Pakistan. But it received the highest popularity among Pakistanis as international opinion polls indicated. On the other hand, the US was among the top economic and arms suppliers in the post-9/11 period, but received an unfavourable response from the Pakistani public. The leadership of the two countries developed Sino-Pakistan relations on the basis of equality, mutual respect, fair treatment while keeping in view long-term perspectives. This should not be replaced by short-term interests of politicians and companies. Geography and history bind us together.
Given the Pakistani political milieu and vibrant media it is hard for our politicians to keep matters in the dark for long. One day or another details of the contracts will surface. If there is no ill intention or political motive behind those deals a democratically elected governed should have no trouble sharing their details. National projects of such mammoth proportion should not be handled by a single party or family. Aside from the aspects that might deal with national security, the rest of CPEC must be made public.
Dr Ghulam Ali obtained PhD from Australia. He is the author of China-Pakistan Relations: A Historical Analysis (2017). The views expressed are his personal and do not represent any institute. He can be reached at email@example.com