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Thursday, June 22, 2017
Has China taken over Pakistan?
It would be no exaggeration to state, that there has been more written on the China Pakistan Economic Corridor (CPEC) in the Pakistani press over the last two years when the project was initiated, than perhaps any other economic or financial relationship which has affected Pakistan. In this short span of time, more words have been written on what is being called a ‘game changer’, a ‘fate changer’, a project which will transform Pakistan permanently making it part of the developed world, than on the IMF (on which Pakistan has had a huge dependence for 30 years), the World Bank or foreign aid to Pakistan over many decades.
Moreover, the nature of the narrative and the discourse around CPEC, compares very differently with any other financial and economic relationship in the past. Although the US has been Pakistan’s largest donor over 70 years, there has been much criticism of the type of this financial, economic, and subsequently diplomatic relationship, where the US has been seen to be the dominating partner, always asking Pakistan to ‘do more’ for all the monies poured into the country.
Similarly, even though the IMF continues to save Pakistan at critical junctures by providing emergency loans and assistance, no structural adjustment package comes through without much debate and criticism from different sections of society. While there have been some questions raised on the Pakistan-China partnership, the tone and content of discussion has been very different, and even sceptics and those who question some of the terms of the new relationship, concede that much, if not all, is more good, than bad.
The China-Pakistan relationship has always been a very special relationship over the last 60 years, ‘higher than the highest Himalayas, deeper than the deepest oceans’, and more recently ‘sweeter than the sweetest honey’. Just to very briefly summarise the historic nature of the China-Pakistan relationship, one can cite a number of important diplomatic and regional developments which have led to where we are today.
Pakistan was the first Muslim state and third non-communist country to recognise the Peoples’ Republic of China after the revolution. Possibly, the India-China war of 1962 may have been an instigator to developing the relationship much further, built on more substantially by Zulfikar Ali Bhutto, first as Ayub Khan’s Foreign Minister in the mid-1960s, but more aggressively and openly after he became President and then Prime Minister in 1972. After the China-India war, relations between China and Pakistan took on a particularly favourable turn, even in the public (as opposed to the diplomatic) domain.
It has been reported that when Chinese Premier Zhou Enlai visited Pakistan in 1964, the welcoming crowd lifted the vehicle carrying him. Prior to Bhutto becoming Pakistan’s first elected head of government and of state, the facilitation provided by the Yahya Khan government to Nixon and to Kissinger to bring China close to the US in 1970 and 1971, was a particularly important episode, to the extent that the US (and China) both turned a blind eye to the Pakistan armies brutal genocide in the then East Pakistan during the war of liberation for Bangladesh throughout 1971.
Most commentators have made comments based on hearsay, leaks to the press, some press statements and little more. There has been very little public disclaimer about CPEC, yet everyone has already formed at least some opinion.
After his election, Bhutto appeared in public wearing Mao caps and Mao jackets making more than a sartorial statement. It is reported that, ‘at least on one occasion, the entire Bhutto cabinet was photographed decked in Mao coats [jackets]’.Bhutto was said to have ‘injected Chinese culture into Pakistani politics. He would talk at length about Mao in his public speeches’.
Between 1966 and 1980, China provided Pakistan military equipment, apparently without charging any money for it, and set up the Heavy Industries Complex in Taxila, which now is a ‘massive armament industry’, building hardware, with an aeronautical factory building the China-Pakistan JF-17 Thunder jet fighter. Importantly, China also helped develop Pakistan’s nuclear facilities, both for power generation and to build Pakistan’s armed nuclear facilities, helping with the development of Pakistan’s nuclear arsenal.
On numerous occasions when Pakistan was desperately short of funds, the Chinese government has been generous in providing low interest loans. Much of this relationship has been based on Pakistan’s diplomatic support for China, and usually, an anti-India diplomatic initiative, although China is, not surprisingly, Pakistan’s main trading partner where trade is around $10 billion, 16 per cent of Pakistan’s total trade including oil imports.
Moreover, China and Pakistan signed a Free Trade Agreement in July 2007, with some expectations that China-Pakistan trade will reach $20 billion by 2020. It is worth pointing out that by 2015, China had utilised 60 per cent of the Free Trade Agreement concessions, and Pakistan only five per cent. Much of the activity in the past, has often been a quiet, often under-the-radar support to Pakistan, but 2015 changed the dynamics, scale, intensity and complete direction of this old relationship.
Chinese President Xi Jinping arrived in Islamabad in April 2015 bearing gifts worth $ 46 billion, which was given the name of the China-Pakistan Economic Corridor. Over the two years, the size of the ‘gift’ has already grown to $55 billion, with more anticipated over the next few years. CPEC is only one small part (for China) of its global One Belt One Road expansionism, but means almost everything to Pakistan. But what exactly is this CPEC?
Although so much has been written on CPEC, by government officials — there are even two web-sites exclusively for CPEC — by supporters and enthusiasts of the project, and even by critics and detractors, the truth is that very little is actually known about the project. Most commentators have made comments based on hearsay, wishful thinking, leaks to the press, some press statements, and little more. There has been very little public disclaimer about CPEC, yet everyone has already formed at least some opinion.
One academic has at least been honest in saying, that ‘Intellectual honesty demands a stance of neutrality on CPEC till the terms and conditions are disclosed, without which one cannot arrive at an objective assessment of whether it could be potentially beneficial for the country. Only then could one move to the next stage of appraisal, knowing that even potentially beneficial projects of this magnitude have their success depend on many other factors’, yet, speculation and opinion abound. Only after two years of the signing of the agreement, was what is called the Long Term Plan, or Master Plan, for CPEC, developed by the China Development Bank in December 2015, acquired by one journalist, summarised in Dawn on 15 May 2017.
The key components of the Long Term Plan of CPEC are summarised as follows:
What we know (possibly)
u Thousands of acres of agricultural land will be leased out to Chinese enterprises to set up ‘demonstration projects’ in areas ranging from seed varieties to irrigation technology. Demonstration projects of more than 6,500 acres will be set up for high yield seeds and irrigation, mostly in the Punjab. This engagement will run ‘from one end of the supply chain all the way to the other’. Chinese enterprises will operate their own farms. Enterprises entering Pakistani agriculture ‘will be offered extraordinary levels of assistance from the Chinese government’. They will get ‘free capital and loans’, and will be supported by the China Development Bank. One reason given for such extensive investment in agriculture is to provide food and cash crops to China’s Xinjiang Autonomous Zone. This has been called the ‘Sino-isation of farming sector’, by Pakistan’s leading business daily.
u One fertiliser plant with a capacity of 800,000 tons will be built, as will a meat processing plant with an output of 200,000 tons annually. Vegetable and fruit processing plants will be set up, as will a grain processing plant of 1 million tons, and a cotton processing plant with an output of 100,000 tons annually. Chinese enterprises will establish factories to produce fertilisers, pesticides, vaccines and foodstuffs.
u The Chinese will invest in, and extract, Pakistan’s mineral resources, particularly gold, copper, marble and coal. They are to set up industries in textiles, household appliances and cement. In the textile sector, the emphasis is ‘yarn and coarse cloth’.
u A fiberoptics cable is to be laid between Kashgar and Gwadar to bring better connectivity through the corridor.
u China will help build an ‘electronic monitoring and control system’ and run a ‘safe cities’ project in Pakistan. This project will deploy ‘explosive detectors to cover major roads, case-prone areas and crowded places in urban areas to conduct real-time monitoring and 24-hour video recordings’. Signals gathered from this surveillance system are to be transmitted to a command centre, but who will man this, whether the Chinese or Pakistani officials, is not clear.
u Chinese nationals are to receive visa-free travel access to Pakistan, with no reciprocal arrangement for Pakistanis to visit China.
u Using Pakistani media, China will disseminate ‘Chinese culture’ in Pakistan, to ‘further enhancing mutual understanding between two peoples and traditional friendship between the two countries’.
The reaction to this news report in Dawn by the minister for planning and development, is worth citing. He accused the author of the article of presenting a ‘nightmare scenario’, and that the original plan was ‘redundant’, although no alternative plan has been made public — the existing (or old) Long Term Plan was also not made public by the ministry, but was acquired by the journalist. The minister, on Twitter, no less, is reported to have said, that the Dawn story was ‘factually incorrect’ and ‘half cooked’, having said that this is the ‘most scrutinised project in the history of Pakistan’.
While the Long Term Plan which has just been made public, gives extensive details, some of the broader aspects of CPEC announced much earlier are still worth emphasising. The minister for planning and development who is in charge of some of the CPEC projects, has stated that of the original $46 billion, $35 billion has been allocated for Independent Power Projects to generate electricity, while $11 billion was for infrastructure development, for roads, airports, railways and the Gwadar Port. A road linking Kashgar and Kunjarab in China, to Gwadar in Balochistan, is one of the main road projects of this Corridor. He has stated that, “the process for infrastructure projects is transparent. The government of Pakistan does not choose contractors; it is China which nominates a panel of credible Chinese companies which take part in the bidding process”.
One must emphasise, that the Pakistan Army, on numerous occasions, has stated that it will ‘do all’ to defend and protect CPEC, and the army will ‘actively guarantee security’ and will fight all Pakistan’s enemies who are out to ‘sabotage’ this project. A special military force of 10,000 personnel is to be raised to protect CPEC.
It is worth pointing out a number of aspects to the deal done with the Chinese, which are already in the public domain. The still incomplete Gwadar Port has been handed over to the Chinese on a forty-year agreement, with the Chinese Overseas Port Holding Company reportedly having a ‘91 per cent share in the gross revenue of terminal and marine operations and 85 per cent share in the gross revenue from operations of the [Gwadar] free zone’.
The Independent Power Projects in Pakistan, which China will be building, as per existing rules for all such projects, enjoy a life-time waiver on corporate tax payments! Moreover, numerous fiscal exemptions and tax benefits have been given to Chinese firms, and according to some sources, ‘Islamabad [is] to award contracts for all CPEC projects to Chinese contractors, who may or may not partner with local firms and may or may not procure material from local manufacturers’.
It is clear that as a result of CPEC, some sort of transformation of Pakistan, is underway. It also seems more than certain that this is a Chinese project, rather than a Pakistani one.
Not simply related to CPEC over the last two years, but certainly compounded by it, some interesting statistics help put the Pakistan-China new and developing relationship into some context. While Chinese goods after the FTA have flooded the Pakistani markets in many categories — tyres, motorcycles, electronics, household consumer goods, plastics, ceramics, to name a few — it is their investments and purchases of key sectors which have emerged in recent years. They own a large mobile telephone company, the Pakistan Stock Exchange sold 40 per cent shares to a Chinese consortium consisting of three companies, with the Shanghai Electric Company interested in buying Karachi’s electricity distributing company, K-Electric. They have also been given contracts to collect garbage from some cities in Pakistan, and providing numerous other services.
According to some estimates, there are 10,000 Pakistani students studying medicine, engineering and other subjects in China, more than there are even in the US. There are reported to be 10,000 Chinese people/workers in the province of the Punjab alone, and around 750 small and large Chinese companies are in business across Pakistan, with 650 Pakistani companies with Chinese directors.
And what we don’t
Perhaps the most important thing we don’t know, which many analysts and writers have asked is: What will CPEC cost, now, and later?
No one really knows, since so much information has still not been provided, yet estimates abound. They range from Pakistan having to pay $3-3.5 billion annually back to China for the next 30 years for Chinese loans after 2020, to a probable severe balance of payments crisis.
Ambiguity about what level of Pakistani partnerships in projects are permissible, as well as whether certain areas of investment are exclusively for the Chinese, have emerged. For example, numerous Special Economic Zones are to be set up, and public information suggests that these are only going to be for Chinese firms, which has caused a great deal of concern amongst Pakistani investors who feel that they are not getting a level playing field.
A game changer — for whom?
Moreover, many business interests and chambers of commerce groups have complained to the government of Pakistan that while Chinese investors are getting tax breaks and benefits, local industrialists in the same field, are not. They feel that Chinese competition is tough as it is, affecting local industry, but once the Chinese arrive with far better terms, local producers will be completely wiped out. The government and their spokespeople keep reassuring local industrialists that nothing of the sort will happen, but there is great apprehension.
Sovereign guarantees to Chinese power producers have been made, where the Pakistan government will, ‘if the power purchaser defaults on payments, … pick up the liability and pay 22 per cent of the bills of Chinese power producers upfront’.Moreover, ‘no official estimate of the cost of the tax benefits already granted to the contractors and sponsors of the CPEC-related project … are available’.And, this is, in the words of the minister responsible for CPEC, “the most transparent” project in Pakistan’s history. Even the State Bank of Pakistan has raised concerns about the financing of projects around CPEC, and seems to be in the dark about many financial arrangements.
The financial terms of much of the Chinese investments have still not been disclosed. Are these grants, loans, and if so what are the terms of the investments? The Chinese have been given preferential tariffs and terms in electricity generation, but much else is still unclear. There is also a concern amongst local investors that the Chinese will bring in their own labour force — some accounts have said that many will be convicted Chinese prisoners sent to work on Chinese projects in Pakistan. There is also concern that the CPEC roads will mainly be for Chinese goods transported from Gwadar to Kashgar, and nothing else, and Pakistan will merely get some royalty for the use of its Chinese-built infrastructure, but how much this would be is anyone’s guess.
Imperfect information and trying to make sense of CPEC
In light of what we don’t know, and the little that we sometimes do, to have any clear opinion about whether CPEC is a ‘fate changer’, either for the Chinese, or more probably potentially for Pakistan, is not possible. Yet, with what has already been achieved and accomplished and with some trends evident, one can draw some possible scenarios for what may lie ahead. However, any such suggestions could also belong to the realm of either wishful thinking or even wild fantasy, but allow for some reflection.
It is clear that as a result of CPEC, some sort of transformation of Pakistan, is underway. It also seems more than certain that this is a Chinese project, rather than a Pakistani one, and the benefits will be far in the favour of Chinese investments than Pakistani ones, and Pakistanis will be merely externalities to the large project and its investments. Clearly, Pakistan will also benefit, especially once the power production and infrastructure come on line, but most of the benefits are heavily loaded in favour of the Chinese.
Pakistan has been subservient to the Chinese in its appeasement of Chinese interests around CPEC, although, perhaps, this is nothing new in terms of Pakistan’s history and political economy. From the influence of American imperialism for most of its existence, Pakistan gave way to Saudi intrusion in domestic, cultural and social affairs, and now has prostrated itself in front of Chinese imperial designs.
CPEC is a Chinese project, for Chinese interests, and Pakistan just happens to be part of the geographical terrain. Ironic it is, then, that having fought a war against one formally communist regime to stop it gaining access to warm waters, another former communist regime is granted huge easy concessions for the same access.
This is not to deny that Pakistan too, will benefit from Chinese investments, and ‘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’.Yet, many observers caution Pakistan after how Chinese terms and investments turned sour in Sri Lanka, Tajikistan and in many parts of Africa.
In both Sri Lanka and Tajikistan, with rising costs and debts incurred by the host countries, large chunks of land were handed over to the Chinese in lieu of unpaid funds. It is estimated that Tajikistan had to cede one per cent of their country to China since they were unable to pay loans — a third of the country’s debt was owed to China — acquired at a time of great fanfare, another ‘game changer’.There are even fears that Pakistan will become just another province of China, or will be reduced to being a ‘vassal state’.
Pakistan’s obsession with China and CPEC, also bodes ill for any sort of rapprochement between India and Pakistan unless, of course, only if the Chinese initiate such moves and if it fits into their grander designs in the region. With China taking over Pakistan, providing it with immeasurable amounts of investments, any arguments of increasing trade and economic cooperation between India and Pakistan, lose all urgency. When you have China, who needs India.
Does the past have a future?
Let me conclude this talk with some quotations without much comment, for they best reflect some concerns that have been raised in the public sphere by many Pakistanis. In fact, Pakistan’s main business daily, the Business Recorder, carried, two, not one, large sections in its Analyses and Comments pages over the last few weeks, invoking a notion which has not been raised in Pakistan since independence seventy years ago.
A businessman, who is the head of a large investment company in Pakistan stated: “We have to be careful if we don’t want this [CPEC] to turn into a repeat of the East India Company”.More importantly, Senator Tahir Mashahdi who is the Chairman of the Senate Standing Committee on Planning and Development said, “Another East India Company is in the offing; national interests are not being protected. We are proud of the friendship between Pakistan and China, but the interests of the state should come first”.
Finally, let me end with a quote from someone who knew this city, Calcutta, very well. Writing in 1765, Robert Clive, looked ahead almost a century, when he said: “We have at last arrived at the critical juncture, which I have long forseen, I mean that Conjuncture which renders it necessary for us to determine, whether we can, or shall take the whole to ourselves … It is scarcely a Hyperbole to say that the whole Mogul Empire is in our hands”.