How Chinese investments are capturing Pakistan's economy

The multibillion-dollar China-Pakistan Economic Corridor (CPEC),announced in 2015, was aimed at overhauling Pakistan's crumbling infrastructure and linking the nation's southern port of Gwadar to western China.

The ambitious project, part of Chinese President Xi Jinping's signature Belt and Road Initiative, was originally estimated to bring in $46 billion (€38.7 billion) of investment into Pakistan. But it's now estimated to have increased to about $65 billion. During the first phase of CPEC, dozens of projects, mainly related to power and transport infrastructure, were carried out with the help of Chinese money. The second phase of the initiative, which began last December and comprises 27 projects, has focused on boosting manufacturing capacity and job creation.

And Beijing has been pumping money not only to Pakistan's economic hubs, but also to places like Pakistan-administered Kashmir and northwestern Khyber Pakhtunkhwa province. Many Pakistanis remain euphoric about the growing Chinese investment in the country, arguing that it's needed to pull Pakistan out of a severe ongoing economic crisis.

Compounding the economic turmoil is the COVID pandemic, which has caused tens of thousands of small businesses to shut down and resulted in over 20 million people losing their jobs. Pakistan's Khyber Pakhtunkhwa province was badly hit by Islamist terrorism between 2004 and 2015. Tribal areas in the region were considered a hub for Islamists, including those affiliated with terror outfits like al-Qaida and the Haqqani network.

Given this terrible law and order situation, many Western countries and businesses were not willing to invest in the province.Qaiser Ahmed Shaikh, a former president of the Karachi Chambers of Commerce, said that China has moved in to fill the gap left by the West.Anila Khalid of Khyber Pakhtunkhwa Women's Chambers of Commerce believes that Chinese investment is a "source of blessing" for the Pakistani economy.

"First, China invested in our province under CPEC, working on various power and infrastructure projects," she told DW, adding that "now it is also investing in sanitation and other projects.In the southern province of Sindh, Chinese firms have not only completed several CPEC projects but have also bought a 40% stake in the Pakistan Stock Exchange (PSX) company.

Ahmed Chinoy, a prominent businessman from the port city of Karachi and director of the PSX, told DW that the Chinese now have the powers to appoint the managing director, chief financial officer and chief regulatory officer of PSX.Such appointments, nevertheless, have to be endorsed by the board of directors, he added.Last June, the stock exchange was attacked by Baluch insurgents, who resent the Chinese investment in the insurgency-hit Baluchistan province.
But Beijing seems to be undeterred by these threats.

Multiple sources told DW that China is planning to buy a power utility in Karachi, which is one of the largest energy companies in the country."The Chinese are trying to invest everywhere in Sindh," said a regional government official on condition of anonymity.He pointed out that recently, sanitation contracts in five districts had been given out to Chinese companies. A number of businessmen, the Karachi Metropolitan Corporation and various trade union members corroborated the official's claim.

They expressed anger at the government for giving away such lucrative contracts to Chinese firms, which they believe undermines the authority of civic bodies. Khurram Ali, secretary-general of the Awami Workers Party in Karachi, claims that various oil exploration blocs in Sindh have also been given to Chinese companies.

Western companies like British Petroleum had been operating such blocs in the past, he added.Baluchistan is Pakistan's largest province of by area, housing the strategically located Gwadar port, which is run by a Chinese company. The province has witnessed a number of terrorist attacks in the last 17 years, some of which directed against the Chinese.

Baluch rebels have been fighting against the Pakistani state in a bid to gain independence for the region. They have often attacked non-Baluch as well as Baluch opponents besides targeting the police and the army.While the region is considered risky for investment, the Chinese appear to have had no qualms so far in funneling money into the province.They have been building an airport in Gwadar, along with a number of other major projects.

Rahim Zafar, a resident of the port city and a former adviser to ex-Prime Minister Zulfiqar Ali Bhutto, told DW that the Chinese had set up three factories close to the port of Gwadar, which are not part of CPEC.They are also involved in fishing business, bringing in deep-sea trawlers, catching fish in a non-sustainable way and depriving the locals of the catch, he added.

Jan Muhammad Buledi, a former spokesman for the Baluchistan government, told DW that the Chinese businessmen are involved in the extraction of marble and minerals through local partners in various parts of the province.Lahore-based analyst Ahsan Raza believes that the meeting of Prime Minister Imran Khan with around 100 Chinese investors last year encouraged the Chinese to invest in Pakistan.

The China-Pakistan Economic Corridor (CPEC) has deepened the decades-long strategic relationship between the two Asian nations. But it has also sparked criticism, including that it burdens Pakistan with mountains of debt, allowing China to use "debt-trap diplomacy" to gain access to strategic assets.

While some of this criticism is valid, a closer look indicates that concerns around debt sustainability, tepid economic growth and overall economic and social instability in Pakistan predate CPEC. Moreover, it is the lack of long-term structural reforms that has stymied equitable socioeconomic progress in Pakistan.

The foundations of CPEC, part of China's Belt and Road Initiative, were laid during Chinese Premier Li Keqiang's visit to Islamabad in May 2013. At the time, Pakistan was reeling from regular bomb blasts, chronic power shortages and weak economic growth. China made a commitment to play an integral role in Pakistan's economy, with Li exhorting both countries to "focus on carrying out priority projects in connectivity, energy development and power generation and promoting the building of a China-Pakistan economic corridor."

China's ability to exert influence on Pakistan's economy has grown substantially in recent years, mainly due to the fact that Beijing is now Islamabad's largest creditor. According to documents released by Pakistan's finance ministry, Pakistan's total public and publicly guaranteed external debt stood at $44.35 billion in June 2013, just 9.3 percent of which was owed to China. By April 2021, this external debt had ballooned to $90.12 billion, with Pakistan owing 27.4 percent -$24.7 billion - of its total external debt to China, according to the International Monetary Fund (IMF).

Nevertheless, China has, to date, refrained from directly influencing Pakistan's economic policies. In fact, as the ongoing IMF loan program has indicated, the IMF, World Bank and Asian Development Bank (ADB) continue to be the key players when it comes to determining the fiscal policies that are adopted in Islamabad.

Pakistan and China have a strategic relationship that goes back decades. It was then only natural that Pakistan would turn to China at a time when it needed a rapid increase in external financing to meet critical investments in hard infrastructure, particularly power plants and highways. CPEC's early harvest projects met this need, leading to a dramatic increase in Pakistan's power generation capacity, bringing an end to supply-side constraints that had made rolling blackouts a regular occurrence across the country.

Additionally, China provided financial and technical expertise to help Pakistan build its road infrastructure, expanding north-south connectivity to improve the efficiency of moving goods from Karachi all the way to Gilgit-Baltistan. These investments were critical in better integrating the country's ports, especially Karachi, with urban centers in Punjab and Khyber-Pakhtunkhwa provinces.

Chinese investments have not been narrowly focused on bilateral governmental investments. In 2016, 40 percent of Pakistan Stock Exchange's shares were sold to a Chinese consortium, and in 2018, Ant Financial, an affiliate of the Chinese Alibaba Group, invested $184.5 million to buy a 45 percent stake in Pakistan's Telenor Microfinance Bank.

The momentum has picked up in recent months: In November 2020, two Chinese companies reached an agreement to set up a cellphone manufacturing plant in Faisalabad; Challenge, a Chinese textile manufacturer, is investing $150 million to build a manufacturing facility in Lahore to export sportswear to Western markets; and Chinese investments are also changing conservative Pakistan, with Hui Coastal Brewery and Distillery Limited initiating operations to produce beer in Balochistan.

All of this has created employment and economic opportunities across Pakistan."The government has reformed the regulatory framework for the investors in general and Chinese investors in particular. So, they are investing in hospitality, information technology, telecom, consultancy and other sectors," Raza said.

Shaik, the former head of the Karachi Chambers of Commerce, believes cheap labor and high profit margins are driving the Chinese to invest in Pakistan."There is also less competition because although the government has announced relaxations and privileges for all investors, Western businesspeople are not ready to invest in Pakistan," he said.

"In addition, the Chinese can repatriate 100% profits as there is no bar for reinvestment in the country," he added.While some businesspeople in Pakistan claim that Chinese firms are being given preferential treatment when it comes to handing out public contracts, the government rejects such allegations.

Fazal Muhammad Khan, a member of parliament from the ruling party, told DW: "We neither give any preferential treatment to Chinese companies nor are contracts doled out. We take conflicts of interest and other factors into account. And the ground is open for both Chinese and Western companies."

---DW