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China’s inroads into the Pakistani economy


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While the Pakistani president and foreign minister visited China at the height of pandemic in March 2020, the scheduled visit of Chinese President Xi Xinping to Pakistan was deferred several times.

Getting the CPEC (China-Pakistan Economic Corridor) Authority law passed high handedly in the National Assembly in February 2021 has made the Pakistan government’s position more embarrassing as lack of progress on the mega-project has come under increased scrutiny in the eyes of media and public. The subtle signs of unease between the two countries over the future direction and subsequent funding of CPEC projects had already started surfacing earlier especially after the outbreak of the COVID-19 pandemic. While the Pakistani president and foreign minister visited China at the height of pandemic in March 2020, the scheduled visit of Chinese President Xi Xinping to Pakistan was deferred several times, citing the same reason. The annual meeting of Joint Coordination Committee, which is the most awaited event for various stakeholders of CPEC projects, got postponed throughout 2020. Similarly, the meetings of sectoral Joint Working Groups were delayed for months before being conducted for the namesake in later part of the year. The outcome of these meetings reveals significant scaling down of Pakistan’s expectations regarding inclusion of more projects under CPEC phase II. While the country has long portrayed the $6.8 billion Main Line-I project to be the main artery of Pakistan Railways and tried to convince China to finance the project, the Chinese side has tried to avoid any commitment for funding. Even when the meeting was held, the Pakistani side was unable to secure any favorable consideration, including the concessionary loan at an interest rate of 1%. Hesitant to agreeing to Pakistan’s demand, China instead offered a mix of commercial and concessional loans to fund the railway project, backed by suitable guarantees by Pakistan. Although it is the largest among the lot, ML-1 is not the only project facing significant delays. According to Pakistani CPEC Authority, so far, 17 projects worth $13b. have been completed, while another 21 projects having an estimated cost of $12b. are under implementation. Construction of Gwadar Port, Eastbay Expressway, and the Thakot-Raikot section of the Karakoram Highway is facing delays due to lack of coordination among responsible agencies from both countries. Despite high-decibel publicity by Pakistan, we have not seen any significant number of Chinese investors showing interest in setting up units in the special economic zones being established as part of industrial cooperation under the CPEC. Now, Pakistan is trying to lure these investors by promising one-window facilitation for these zones. Similarly, all is not functioning well with the Pakistani authorities when it comes to supporting CPEC projects in Gwadar. During a meeting of the Cabinet Committee on CPEC in January 2021, a warning had to be issued to Federal Board of Revenue Chairman Javed Ghani for delaying required tax exemptions for the Gwadar Free Zone. The delay in framing up of Gwadar Free Zone policy, custom procedures and rules and regulations has been an impediment for the investors willing to establish businesses in Gwadar. It has been pointed out that although 42 licenses had been issued to potential investors, business activities could not start due to the absence of a free-zone policy. Other problems included: 1) non-availability of power; 2) evacuation of land for free zone phase I from the Pakistan Coast Guard and Pakistan Navy; 3) exemption of Gwadar Port from provincial taxes as per a concession agreement; 4) delay in construction of breakwater and dredging of berthing area. Trying to come to terms after the recent setbacks, Pakistan is now pinning hopes on the Chinese president visiting the country in 2021 and providing some financial impetus to the stalled projects. Against this backdrop, the hype created by the Pakistani government through projecting the CPEC as a panacea for all problems is rapidly losing steam. The project not only lacks clear direction to steer it through, but continues to struggle due to absence of coordination among various agencies. The realization is gradually dawning upon various government agencies that Pakistan’s economy has failed to achieve any real benefit from the CPEC. THE LOCAL business class also fails to connect with the Pakistani government’s claims of significant economic gains from the grand project. The emerging feeling among Pakistani businesses is of exclusion and neglect by their own country. Struggling local businessmen lament that Chinese investors are cornering key domestic industries, state assets and businesses to the detriment of Pakistani players and interests. Interestingly, non-CPEC Chinese private investment in Pakistan is increasingly driven by cheap labor and by securing access to raw materials that are shipped back to manufacturing facilities in China. China is also building factories in Pakistan to export finished goods directly to European markets, which deprives the Pakistani exporters of their share of opportunities to trade with these countries. Concerns of local businesses have parallels in the working-class population as well. Creation of jobs for the local youth is an important yardstick for assessing the benefit of any foreign investment in a developing country. However, the CPEC has been a visible failure on this count. While Nawaz Sharif’s government had painted a rosy picture about Chinese investment translating into more job opportunities for young Pakistanis, until now, trends have indicated otherwise.  As is evident from completed CPEC power projects, China has preferred to use its own workers and engineers for skilled jobs. It has not hesitated in setting up special colonies for Chinese workers along the project sites, and this trend is likely to continue. Things are expected to turn worse for people working in older Pakistani establishments as well. Reports say that Chinese investors are keen to buy into various losing state-owned enterprises (SOEs) that the government is willing to sell. With SOE-related losses reaching 1.5 trillion rupee ($9.4b.) recently, the government is left with little choice in the matter. The list includes prominent names such as Pakistan International Airlines and Pakistan Steel Mills. Pakistani business owners and workers are wary of the Chinese style of functioning, which rarely involves partnerships or joint ventures with local businesses. Chinese investors prefer to establish fully controlled businesses that would mean further erosion in the status of local businesses and jobs. According to official records, more than 2,000 Chinese business entities have already registered in Pakistan, half of them in the capital Islamabad. However, according to independent corporate analysts, the number could be much higher, with some Chinese being active in Pakistan’s informal business sector as well.  An analysis of industrial inroads made by China into Pakistan points toward greater designs of neo-colonialism. One major target of Chinese policy has been the textile industry, which is the backbone of Pakistan’s domestic economy and the major source of livelihood for the majority of workers in Pakistan. Though not initially indicated, Chinese private interests are investing heavily in textile production, a sector that contributes 8.5% of gross domestic product and employs 45% of the total industrial labor force. In Punjab, the Shanghai Challenge textile company recently acquired a 25% stake in Masood Textile Mills Faisalabad, a hub of Pakistani clothing and textile manufacturers. Challenge Apparel, a subsidiary of Shanghai Challenge, operates a Faisalabad-based plant supplying garments to Adidas and Puma for US and European markets. While Islamabad is working on removing official hurdles for attracting more Chinese investment in CPEC phase-II, China is clearly shifting its focus beyond the mega-project. With long gestation periods and uncertainty of financial returns, China now seems keen to enjoy the low-hanging fruits at the cost of future Pakistani generations.

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