How China is sucking Pakistan dry with CPEC
The quagmire
Before the idea of the China-Pakistan Economic Corridor (CPEC) was initiated in 2013, Pakistan’s trade deficit with China was less than $5 billion. But unfortunately for Pakistan — and fortunately for China — it kept surging once the work on the billion-dollar project started.
According to the State Bank Of Pakistan’s staff report — “Dynamics of Pakistan’s Trade Balance with China” — Pakistan’s volume of bilateral trade expanded and reached US$ 13.8 billion in FY16, up from US $ 2.2 billion in FY05.
However, the bilateral trade balance remained tilted in China’s favour, as Pakistan’s exports to China could not keep pace with its imports from the country — the country's exports to China increased from US $ 0.4 billion in FY05 to US$ 1.7 billion in FY16.
As against this, imports from China grew exponentially — increased from US$ 1.8 billion in FY05 to US$ 13.9 billion during Jul-May FY17. In fact, Pakistan’s top imports come largely from China with the exception of oil.
The rise in imports from China is mainly attributed to the surge in machinery and equipments in the backdrop of the so-called development activities — also called CPEC — in Pakistan.
In CPFTA (China Pakistan Free Trade Agreement, 2007), Pakistan reduced tariffs to zero on its imports of Chinese electric and electronic products, machinery, chemicals and many other items. In this way, China got a huge advantage. Firstly, when the agreement was signed, but mainly after the CPEC started, because of humungous increase in its machinery exports to “all-weather friend” Pakistan. Also at the same time, it ballooned Pakistan’s trade deficit with China.
Remember that in CPFTA, China offered no tariff concession on imports from Pakistan that included fish, cotton, paper, plastic and textile items.
For Pakistan, the situation seems alarming with China forcing it to buy Chinese equipment for use in Chinese projects, shredding its reserves. Then it extended Pakistan loans to cover the purchases, which increases the burden of debt on Pakistan’s economy. Machinery imports alone from China in the first two years of the CPEC raised Pakistan’s current-account deficit by 50 per cent.
The Chinese simply don’t want the world to know their sinister objective of looting the key national assets of less-developed economies after pulling them into a debt trap.
From Pakistan to Montenegro, from Laos to Kyrgyzstan, many nations owe huge debts to China. Let us take the example of Sri Lanka. It owed more than $1 billion to China and unfortunately wasn’t able to service the debt. China reportedly forced it to hand over Hambantota Port on lease for 99 years. One might find it shocking to know that after the completion of the CPEC, Pakistan will owe China more than $62 billion.
In April this year, China approached Vanuatu to set up a military base, which owed Beijing about $250 million. Tonga also carries some big debts and is facing difficulties in servicing them. The prime minister of Tonga, Akilisi Pohiva, in August showed his concerns over China’s debt-trap diplomacy, saying Beijing was preparing to seize assets from his country.
With foreign exchange reserves between $ 7 billion and $ 8 billion — just enough to pay for imports of less than seven weeks — and ballooning balance of payment crisis, Prime Minister Imran Khan, after receiving $6 billion bailout package from Saudi Arabia, went to China with high hopes.
The revelation
It was hard for every Pakistani to accept the reality — as no one had ever thought that it could happen someday — that China ignored Pakistan’s call for aid by saying that more talks are needed before it extends any monetary help.
Islamabad’s friendship with Beijing has always been termed as “higher than the highest mountain and deeper than the deepest ocean, and sweeter than the honey". But it seems the love between two nations is one-sided — that is, only from the side of Islamabad.
According to the 3,000-thousand word long China-Pakistan joint statement, the Xi administration had enough time to discuss with Pakistan about their political and strategic relationship — the China-Pakistan Economic Corridor (CPEC), mutual trade and investment cooperation, marine, science and technology, space, environmental and agricultural cooperation, social sector cooperation, people-to-people and cultural linkages, defence, security and counter-terrorism cooperation and international and regional issues. Yet, it needed more time to discuss details of any possible bailout package with Pakistan.
According to the Vice Foreign Minister of China, Kong Xuanyou, “As for the specific (financial aid) measures to be taken, the relevant authorities of the two sides will have detailed discussions.”
Furthermore, the communiqué also had nothing mentioned about a possible bailout package.
At the Great Hall of the People in Beijing PM Imran Khan and Chinese premier Li Keqiang signed 15 agreements and memorandum of understanding (MoUs) for cooperation in agriculture and industrial development, poverty alleviation and technical training. Also, the Chinese administration pledged to help Pakistan in establishing special economic zones.
Is seems that deep within the situation between the “iron brothers” is more intense than how the Finance Minister — also known as an 'economic expert' — Asad Umar tried to portray during a press briefing on Tuesday, November 27. He said China is committed to providing short-term relief to Pakistan — the modalities of which, will be discussed in a new round of discussions.
Chinese Vice Foreign Minister Kong Xuanyou told reporters that there would be no change in the number of projects under the CPEC. If there were, it would be only to increase, not decrease the number of projects. However, the scope of the project would increase and will tilt in favour of people’s livelihoods.
This sounds more like a warning than a normal friendly statement.
Also, let's not forget what Chinese Foreign Ministry spokesman Lu Kang said in October at his press briefing in Beijing . On the one hand, when he endorsed Pakistan’s request to the International Monetary Fund (IMF) for financial assistance, but shockingly also cautioned that the facility should not affect economic cooperation between Islamabad and Beijing.
What I understand from these statements is that China is in no mood to make any sort of compromise in the $62-billion China Pakistan Economic Corridor. Also, whenever the Xi administration would notice Islamabad doing a rethink on the dollar-wasting CPEC projects — which indeed it should do — it will throw up what Beijing actually has in its heart.
According to a Pakistani online news portal, Xi administration showed Imran Khan the “controversial” statements made by his ministers about China Pakistan Economic Corridor, and raised its concerns over such a behavior. It could be the interview which Razak Dawood — the Pakistani cabinet member responsible for commerce, textiles, industry and investment — gave to the Financial Times in September that disclosed how the Imran Khan government actually views the so-called “win-win” partnership with China.
Dawood clearly said in the interview that the previous government (of Nawaz Sharif) negotiated the CPEC deals in the worst possible way with the Chinese, and, therefore, it gave away a lot to them.
He added, “I think we should put everything on hold for a year so we can get our act together… Chinese companies received tax breaks, many breaks, and have an undue advantage in Pakistan. This is one of the things we’re looking at because it’s not fair that Pakistani companies should be disadvantaged.”
This particular interview — which exposed the dark side of the multi-billion dollar project — seems the only reason behind China’s unexpected behaviour with its “iron brother” Pakistan.
Unfortunately, Imran Khan returned with an empty 'begging bowl' from Beijing.
On November 7, an International Monetary Fund (IMF) team arrived in Islamabad for possible bailout negotiations with the Khan administration. According to Dawn, the talks were expected to last until November 20.
The team met with the officials of the Ministry of Planning and Power Division and unfortunately a $9 billion discrepancy surfaced between the figures quoted by Islamabad and Beijing on account of cost of ongoing and completed projects.
While briefing the media in October, the Chinese Ambassador to Pakistan, Yao Jing, said that the 22 CPEC power projects which have been valued at $19 billion were either under consideration or have been completed. But according to Pakistan's Ministry of Planning, the cost of 22 ongoing and completed projects is $28.6 billion.
A Planning Ministry official, on condition of anonymity, told the Express Tribune that the Chinese Embassy in Pakistan is not showing Kohala power project, the 300 megawatts Gwadar Power Plant and Oracle power plant among the ongoing schemes.
It indeed has given birth to doubts about the China Pakistan Economic Corridor. Also, it seems that the Chinese are trying their best to portray a "very costly" CPEC project as “not so costly".
On November 9, Imran Khan — while presiding over a parliamentary meeting of the Pakistan Tehreek-e-Insaf — said China has “barred” his government from disclosing the amount of financial assistance given to Pakistan.
On November 8, Chinese Foreign Ministry spokesperson Hua Chunying said that Beijing will provide assistance to Pakistan to the best of its capacity. “In future, in the light of Pakistan’s needs and by the mutual agreement, we will continue to offer our help economically and also in the sector of people’s livelihood," she added, without mentioning how many dollars will the Xi administration provide to its “all-weather ally” Pakistan.
As usual — and just like every other Chinese official — she didn’t miss the opportunity to talk about China’s intentions to expand the CPEC. I wonder how much China wants to expand it, as she said: “The two sides will move the China-Pakistan Economic Corridor (CPEC) forward to expand projects under this flagship project.”
A high-level delegation from Pakistan which include the secretaries of finance, trade and planning, as well as the governor of the State Bank of Pakistan, left for China on November 8 to “discuss” the potential financial aid with Xi administration. But still no one from Khan’s cabinet — including him — has still confirmed the details of Chinese the bailout to a suffering Pakistan.
If China has provided Pakistan with certain financial aid — which according to PM Khan is unprecedented — what it has asked in return?
In all likelihood, it seems that President Xi Jinping has asked the South Asian “all-weather ally” to prohibit its ministers from issuing “controversial” statements about the CPEC and to put efforts at portraying a “positive” image of the multi-billion dollar project. Also, he may want the Khan administration to not raise objections on further expansion of the “win-win” economic corridor.
The leverage
The Gwadar Port would prove to be the last resort for China to survive if a war erupts in South China Sea. It will act as the only shock absorber in that case by giving China access to the Persian Gulf for crude oil imports.
Approximately 3.5 million square kilometre area — rich in oil and natural gas reserves — of South China Sea has been under dispute as China, Philippines, Vietnam, Malaysia, Taiwan and Brunei have all claimed sovereignty over this territory. Since $1.2 trillion of US-traded goods pass through this route, Washington wants it to remain as part of international waters and, therefore, it is also involved indirectly in the conflict.
In 2016, almost 80 per cent of China’s oil imports passed through this route via the Strait of Malacca.
Also, it meets 50 per cent of its oil demand through imports from the Middle East.
For an oil-hungry country like China, a long-term closure of the South China Sea route — for one reason or the other — would present a worrisome economic and political scenario.
China imported a record 6.7million barrels a day of oil in 2015 and forecasted "to overtake the US as the world’s biggest crude importer in 2016."
Pakistan will always have a leverage during any sort of negotiation with China on the matter of the China Pakistan Economic Corridor.
China should keep in mind that if a war erupts in the South China Sea, its citizens will starve if Pakistan won’t give her access to Gwadar Port.
Although China seems to be the main beneficiary of the CPEC mega-project, it is not that simple. The terminus of the economic corridor is Pakistan’s own Gwadar Port, which could prove to be China’s salvation if conflict in the South China Sea disrupts its trade routes, especially its access to energy resources.
Pakistan will never forget how China refused (PM Imran Khan) to pull it out of the balance of payment crisis — a crisis, for which China and only China was responsible.
Also read: Why CPEC could be the end of China-Pakistan relationship