China has been established as the world’s largest trading nation, the second largest source and destination of foreign direct investment (FDI) and second largest consumer market since 2015, which has progressively turned it into a hub of global commodity and capital flows. For China, the geographical proximity is a key element affecting its geo-economics as its economic globalization and power discourse has been dependent on the neighboring countries as well as that of the region. This economic power model of China is termed as ‘Interdependence Asymmetry’, a model constructed by Du (2016) based on Keohane and Nye’s theory, and used the bilateral trade figures of China with other countries as the indexes to analyses the interdependence asymmetry[i].
This model has inspired the One Belt and One Road (OBOR) or Yi Dai Yi Lu initiative of China that was launched in 2013 and its part China-Pakistan-Economic-Corridor (CPEC) to meet three main motives of China, namely, economics, geopolitics, and energy security. The Belt and Road Initiative (BRI) reflects the geo-economic effort of China to have an influence over the countries without using any logic of conflict or force, but through investment and economic aid. The CPEC as part of this initiative has been introduced as a geostrategy of China to get a control on the Indian Ocean Region (IOR), expand access the Middle East and Central Asian Region, and most particularly to encircle India and its energy supplies.
However, according to some, the issues of corruption, security costs and debt related stress of Pakistan have increasingly affected the Chinese stance and made it reluctant from investing in the CPEC[ii].
Using this context, this paper analyses the ways in which the growing reluctance of China impacts its investments in the CPEC corridor and the ways in which it would affect the all-weather friendship of China-Pakistan. The sections of the paper are organized as- (a) the investment in Economic Corridors as part of Chinese BRI; b) the significance of CPEC for both countries; c) trends causing decline of Chinese investment in CPEC; d) What it means for India?
Economic Corridors and BRI
Since the announcement of BRI by the Chinese President Xi Jinping, the primary focus of China’s foreign policy has been the five areas highlighted in the official BRI document “Vision and Actions on Jointly Building Silk Road Economic Belt and the 21st-Century Maritime Silk Road” (National Development and Reform Commission (NDRC) (2015). These areas of concerns are- policy coordination, connectivity facilitation, unimpeded trade, financial integration, and people-to-people trade, which are quasi-officially termed as means to enhance “win-win” economic collaboration[iii]. China has been investing and cooperating with multiple countries to achieve the connectivity goal of BRI most particularly in six economic corridors- China-Pakistan, New Eurasia Land Bridge, China-Mongolia-Russia, Indochina Peninsula, Bangladesh-China-India-Myanmar, China-Central Asia-West Asia, which carry a substantive potential of giving advantage to China in the Asian region as well as the world order[iv]. Infrastructure and connectivity have become a new tool of geopolitics with BRI making states to break out or move beyond their prescribed geography to protect and advance the national interest.[v]
CPEC and Gwadar: enhancing China-Pakistan all-weather Friendship.
CPEC is part of the Chinese objective to develop the western provinces of China and establish a viable transit route via Pakistan to connect with Middle East and Central Asia as well as ensure energy import security in low cost and less time[vi]. CPEC as part of BRI is 44 miles or 72km across the border to the east developing in Pakistan with Chinese financing and cooperation. Under the CPEC project, China committed to fund construction of a) Gwadar Port that is a USD 46 billion project in Balochistan Province of Pakistan, b) 800-mile Karakoram Highway to link Xinjiang province with the Gwadar Port. Gwadar Port under CPEC is a part of China’s ‘Go West Strategy’, a program that goes back to the ‘Two Broad Development Scopes’ by President Deng Xiaoping in 1978 as part of the Chinese economic reforms to facilitate the access to straits of Hormuz and the Indian Ocean[vii]. China’s string of pearls encirclement strategy to encircle India is also a motivator for the Chinese investment in the Gwadar port construction and use CPEC for future security and presence in the South Asian region while dealing with the potential internal as well as external instability of Pakistan[viii]. The CPEC has received mixed responses in Pakistan with some considering it as a panacea for already ailing economy of Pakistan, and others consider CPEC as an opportunity that would enhance its power sector. Pakistan has been dependent on China for the construction aids and loans and perceives it as a potential geostrategy of Pakistan to balance India in the region as well[ix]. While from the Indian perspective, it was considered as one more part of Chinese string of pearls strategy, as the development of Gwadar port and the CPEC would restrict Indian energy trading from the Indian Ocean region[x]. Moreover, Pakistan has already been refusing India from using its transit facilities to trade with Afghanistan and Central Asian Republics, and the port development can give more leverage to Pakistan against India.
The CPEC promotes interconnection and economic integration between China and Pakistan. It reduces the financial problems to Pakistan as only 20% of the funds are loans taken by Pakistan while the rest of the construction aid are from Chinese direct investment and gratuitous aids.[xi] Since the announcement of CPEC construction, 22 projects have been inspected and accepted that are improving electricity, infrastructure, and job situations of Pakistan. The Gwadar port after receiving investment from third party countries has enhancing the strategic relations of Pakistan, which has turned Gwadar port as a potential trade hub. For instance- Saudi Arabia approved the investment of USD 10 billion in a petrochemical complex of Gwadar port in 2019.[xii]
The reluctance of China from investing in the second phase of CPEC construction project has been increasing since the China-Pakistan differences over the planning of USD 6.8 billion worth railway project. There are multiple reasons for the eroding Chinese investment- a) the increasing debt burden of Pakistan; b) corruption of the CPEC authority and Chinese companies residing in Pakistan; c) attempts to expand military control in the Pakistan government over the CPEC projects[xiii].
Firstly, the increasing trends in the liabilities and debts of Pakistan has brought the debt burden to more than 106.8% of its GDP or surged to USD 44.5 trillion by June 2020. In fact, the assumptions are that if the current pace will continue then these debt and liabilities might double by 2023.[xiv] Secondly, the removal of the CPEC chairman Lieutenant General (Retired) Aseem Saleem Bajwa on 3rd July 2020 from his position of special assistant to Prime Minister Imran Khan for Information and Broadcasting due to his alleged corrupt practices in the administration, brought a big question on the CPEC authority in Pakistan. The presence of corrupt officials has been the major reason for the growing debt issue of Pakistan as well. Moreover, it was China that decided to shift the control of CPEC authority from the ruling civilian government to the retired military officials citing the exorbitant costs and non-transparent spending by the former, and the revelation of similar corrupt instances even after the military takeover brought trust issues for China.[xv]
This trust issue reflected in China’s growing reluctance from investing in the CPEC, particularly in the demand for more guarantees before passing the loan to Pakistan for the Main Line-1 (ML-1) railway project, which is a major part of the second phase CPEC construction that would upgrade the railway line from Peshawar to Karachi. The official statement from Chinese authorities said- "keeping in view the financial situation in Pakistan so also the conditions laid down by the G-20 regulations for debt suspension, the government of Pakistan may provide additional guarantee mechanism for the loan other than sovereign loan for the ML-1 project."[xvi] In fact, China trimmed the cost promised to Pakistan for the second phase from USD 8.2 billion to only USD 6.2 billion,[xvii] which received much opposition from Pakistan authorities and people.
The investment seemed to be restored with the changing pattern of global supply chain due to the Covid-19 Pandemic, in which China has actively engaged in export of vaccines and medical equipment to the world. This could enhance the significance of CPEC in the Chinese health diplomacy that could be an opportunity for Pakistan. However, the delay in the investment and infrastructure certainly affected the progress of the CPEC project as well as the regional goals of Pakistan.
What it means for India?
The growing mistrust between China and Pakistan over the above-mentioned issues would slow down the progress of CPEC corridor, which would relieve the challenges and risk for India’s energy security. If the Gwadar port would progressively turn into a trade hub of the region, it would be major risk for India’s not only geostrategic and geopolitical aspirations concerning the region but also the geo-economic goals of India. Along with the China-Pakistan axis being a geopolitical threat or risk for India, the geostrategy of CPEC corridor has been a cause of tension for India considering the alliance of the two neighbors to influence India’s growth in economic as well connectivity terms. Although India’s partnership with Iran on Chabahar Port agreement helped India to have a geostrategic balance this axis, but the engagement of Iran-China for trade and other infrastructure investment at the same time made this geostrategy a limited deal for India. Moreover. China’s capability to determine the actions and policies of Pakistan, the India-Iran relations have never been on the similar terms. Besides Pakistan’s Gwadar Port, the continuous instances of the troubles attached in the Chinese investment and aiding to the receiver country has been affecting the status quo of China as a responsible stakeholder. For instance- the case of the Hambantota Port (Sri Lanka) and Bangladesh trapped in the debt diplomacy of China. This would reduce the chance of the potential encirclement of India that is an increasing goal of China’s BRI and string of pearls geostrategy.
*Neha Mishra, Research Intern, Indian Council of World Affairs, New Delhi
Disclaimer: Views Expressed are Personal.
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[ii] Bilalkhalil, Ahmad, “Pakistan and China: Don’t Fear Chabahar Port”. The Diplomat. 31 January, 2017. Available at: https://thediplomat.com/2017/01/pakistan-and-china-dont-fear-chabahar-port/ (Accessed on 25-02-2021).
[iii] Full text of the Vision for Maritime Cooperation under the Belt and Road Initiative. English.gov.CN.
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[v] Aslan, H. Kursad and Rashid, Yasir, “The Increasing Role of Geoeconomics: Competition between Chabahar and Gwadar Port”. Centre for Iranian Studies in Ankara (IRAM) Report. 24 June 2020. Available at: https://iramcenter.org/en/the-increasing-role-of-geoeconomics-competition-between-the-chabahar-and-the-gwadar-ports/ (Accessed on 01-03-2021).
[vi] Bilalkhalil, Ahmad, “Pakistan and China: Don’t Fear Chabahar Port”. The Diplomat. 31 January, 2017. Available at: https://thediplomat.com/2017/01/pakistan-and-china-dont-fear-chabahar-port/ (Accessed on 25-02-2021).
[vii] Houreld, Katharine, “China and Pakistan launch economic corridor plan worth $46 billion”. Reuters. 20 April 2015. Available at: https://www.reuters.com/article/us-pakistan-china-idUSKBN0NA12T20150420
(Accessed on 27-02-2021).
[viii] Garlick, Jeremy, ‘Deconstructing the China-Pakistan Economic Corridor: Pipe Dreams versus Geopolitical Realities”. Journal of Contemporary China, Volume 27 (112), 519-533. Available at: https://doi.org/10.1080/10670564.2018.1433483 (Accessed on 24-02-2021).
[ix] Why China-Pakistan Ties are ‘unravelling’ over CPEC. The Times of India. 25 January 2021. Available at: https://timesofindia.indiatimes.com/world/pakistan/why-china-pakistan-ties-are-unraveling-over-cpec/articleshow/80450316.cms (Accessed on 28-02-2021).
[x] Rahman, Zia Ur, “The geopolitics of the CPEC and Indian Ocean: security implication for India”. Australian Journal of Maritime & Ocean Affairs”. 26 January 2021. DOI:10.1080/18366503.2021.1875807.
[xi] Chattha, Muhammad Khudadad, “Financing Structure of CPEC”. CPEC Portal, China Pakistan Institute. 3 October 2019. Available at: http://cpecinfo.com/financing-structure-of-cpec/ (Accessed on 31 March 2021).
[xii] CPIC Global, ”Saudi Arabia to invest $10 billion in Gwadar”. China Pakistan Investment Corporation. 21 September 2018. Available at: https://www.cpicglobal.com/saudi-arabia-invest-gwadar/ (Accessed on 31 March).
[xiii] Why China-Pakistan Ties are ‘unravelling’ over CPEC. The Times of India. 25 January 2021. Available at: https://timesofindia.indiatimes.com/world/pakistan/why-china-pakistan-ties-are-unraveling-over-cpec/articleshow/80450316.cms (Accessed on 28-02-2021).
[xiv] Haider, Mehtab, “Pakistan’s debt, liabilities stand at 106.8pc of GDP”. The News. 29 August 2020. Available at: https://www.thenews.com.pk/print/707446-pakistan-s-debt-liabilities-stand-at-106-8pc-of-gdp#:~:text=Pakistan's%20total%20debt%20stood%20at,476%20trillion%20till%20June%202020
(Accessed on 22-02-2021).
[xv] Shahid, Kunwar Khuldune, “Asim Bajwa Exposé Underlines the Corruption Linking the Pakistan Army and CPEC”. The Diplomat. 4 September 2020. Available at: https://thediplomat.com/2020/09/asim-bajwa-expose-underlines-the-corruption-linking-the-pakistan-army-and-cpec/ (Accessed on 25-02-2021).
[xvi] The Economic Times, China seeks additional guarantees before sanctioning $6 billion loan for rail project in Pakistan. 24 December 2020. Available at:
https://m.economictimes.com/news/international/world-news/china-asks-pakistan-for-additional-guarantees-for-6-bn-loan/articleshow/79917001.cms (Accessed on 28-02-2021).
[xvii] The Economic Times, China backing away from its financial promises to Pakistan under CPEC: Report. 25 December 2020. Available at : https://m.economictimes.com/news/international/world-news/china-backing-away-from-its-initial-financial-promises-to-pakistan-under-cpec-report/articleshow/79950928.cms (Accessed on 1-03-2021).