The US$46 Billion Silk Handshake

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The emerging Silk Road relationship between Pakistan and China is an Asian economic pact that is unprecedented in scope and impact.

The importance of the China state visit to Pakistan in April 2015 was immediately apparent when the Air China flight carrying President Xi Jinping entered Pakistani airspace to be escorted by eight Pakistani Air Force JF-17 Thunder fighters. This jet escort to Islamabad’s Nur Khan Air Force Base, adjacent to Benazir Bhutto International Airport, was filled with meaning. After all, the JF-17 fighter jet is the result of a China-Pakistan successful joint project and the trip officially announced a new phase of the China-Pakistan Economic Corridor (CPEC), underway as part of China’s Silk Road initiative, One Belt, One Road (OBOR).

The result of this high level diplomatic venture was the signing of a staggering US$46 billion worth agreements and projects. It was a short two-day window for the OBOR Road Show, but the ramifications were major. With this landmark signing it was clear that Pakistan had cemented its role as the keystone hub where One Belt, One Road land and sea routes crisscross. In the event packed trip, Xi used valuable face-time with Pakistani President Mamnoon Hussain, Prime Minister Nawaz Sharif, other national leaders and business representatives to share views and fortify relations with China’s “iron friend.”

In between the signing of 51 agreements, Xi and Nawaz attended groundbreaking ceremonies for five important energy projects. Luckily no travel time was required, these virtual visits by the OBOR team were conducted by video link. Before departing, President Xi became the first foreign dignitary to address the Pakistani parliament. The Chinese leader warmly summing up his visit, with a sugar coated comment, saying, “I feel as if I am going to visit the home of my own brother when coming to Pakistan.”

Ghufran Memon, the Pakistan Consul General to Hong Kong
Ghufran Memon, the Pakistan Consul General to Hong Kong

Ghufran Memon, the Pakistan Consul General to Hong Kong, watches the situation develop with great interest.  “Looking at the world map you see the value of Pakistan’s unique location,” remarks Memon, who joined the Pakistan civil service 30 years ago and served in various Pakistani ministries at the federal and provincial levels. “The CPEC forms one of the key OBOR corridors to link the land and sea routes. Pakistan is the only country that can connect China to the critical oil producing regions that surround our country.”

Memon is convinced that CPEC will bring prosperity to both nations on many fronts. “CPEC’s Gwadar to Kashgar route provides the benefit of additional energy security as China is able to avoid the hazards of a long sea route,” points out Memon. “Only the portion of the route from the oil producer to Gwadar is not absolutely secure for China. CPEC will bring socio-economic dividends to both western China and Pakistan soon. In the next four years, when the CPEC is 30% complete, the effect of improved energy and transportation systems will be noticeable and Pakistan will undergo positive change in
many ways.”

Cemented Relations

Pakistan has an enduring friendship with China since both countries emerged as new nations from tumultuous circumstances in the late 1940s. China is most appreciative of the proactive manner in which Pakistan has established ties. Pakistan was among the first countries to formally recognize China in 1950 and diplomatic relations were established one year on. A decade later Pakistan voted to restore China’s UN seat and in 1963 Pakistan signed a boundary agreement to cede 2,050 square miles of the disputed Trans-Karakoram Tract to China, ending all border disputes with their northern neighbor.

The underlying strength of this special relationship arose out of need in the geopolitical sphere. When China stood isolated, Pakistan remained on China’s side. Few people recall that it was Islamabad that helped write the script to a defining moment of 20th century history, arranging Henry Kissinger’s secret visit to Beijing in July 1971. This led to US President Nixon’s 1972 Beijing trip, marking the official opening of China to the world again.

The Sino-Pak relationship enters a new era through CPEC. That was the keynote message of the OBOR Road Show. Already, trade figures show China as Pakistan’s largest partner. Trade exceeded US$16 billion in 2014, an annual 12.6% increase. At the same time, the CPEC initiative created jobs and new economic activity along corridor routes. The result of this activity is expected to raise Pakistan’s GDP a projected 15% upon CPEC completion.

No two countries have ever done something of this magnitude before. The amounts being invested in the CPEC framework are unprecedented. They are equal to 20% of the annual GDP for Pakistan, almost three times entire incoming foreign direct investment (FDI) since 2008 for Pakistan. The inflow of cash has overshadowed the US$7.5 billion of US security related aid provided back in 2009, funding that will not produce the same benefits of capital investment into CPEC planned power and transportation infrastructure projects.

The OBOR Road Show PR team made sure the moment was not lost on the Pakistanis. President Xi now prefers the personal format of an op-ed piece to deliver his message, appearing in national newspapers before state visits. In this case, it was the Pakistan’s Daily Times. Pakistanis picked up the daily paper on the morning of the President’s arrival to read Xi’s op-ed quoting a famous Urdu poet. The cultural touch previewed his agenda emphasizing major points. Xi views Pakistan leading another generation of “Asian Tigers”. He stressed the need “to form a ‘1+4’ cooperation structure” to address the new Sino-Pak relationship paradigm, with a “cooperation in security and economic fields that reinforce each other.” 

The 1+4

It is worth looking deeper into Xi’s op-ed in Pakistan’s Daily Times for the direction this relationship is headed. “China and Pakistan need to align economic and trade strategies more closely to deepen economic interdependence,” as the CPEC project is crucial to the whole OBOR initiative. The Xi op-ed further declares, “We need to form a ‘1+4’ cooperation structure with the Economic Corridor at the center and the Gwadar Port, energy, infrastructure and industrial cooperation as the four key areas to drive development across Pakistan and deliver tangible benefits to its people.”

The immediate CPEC focus is on energy-related and road/railway infrastructure projects, some geared for completion as early as 2017. Already US$33.8 billion is allocated toward power generation and US$11.8 for infrastructure as Pakistan aims to overcome two main economic growth obstacles: power shortages and poor infrastructure. By 2017, the national grid acquires 16,400 MW from natural gas, coal, solar, wind and hydropower projects reaching completion. Ahsan Iqbal, Minister for Planning and Development, indicates it will nearly double the current capacity and deliver badly need power.

Infrastructure upgrades are only part of a general industrial upgrade to Pakistan. How the nation serves 67% of the national population living in rural areas remains to be seen. To keep complaints of being left out by Balochistan and Khyber-Pakhtunkhwa provinces from ringing true, CPEC power projects must include these rural areas in current plans. However, dealing with a large rural population in this country of 180 million is something that China understands well and specializes in.

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Javed Iqbal, President of Pakistan Chamber of Commerce Hong Kong, understands that China can support the development of Pakistan in many ways. He remembers clearly the day two years ago when his Chamber of Commerce was inaugurated by Hong Kong Chief Executive CY Leung and President of the Legislative Council Jasper Tsang. CY Leung was clear in his desire to see the new Pakistan Chamber of Commerce promote business links between Hong Kong and Pakistan as well as act as an important financial bridge between Pakistan and the Mainland.

“The most important challenge for Pakistan in the CPEC will be transparency,” states Iqbal. “Our government must openly tell everyone in a calm manner what is involved in the CPEC, how much time it will take and what will happen. Everyone must be made fully aware of the variables and the downside – if any.  Only then, as the people see development of projects, will they trust the leaders and end divisions amongst themselves to make CPEC a success.”

Iqbal believes that in due course new communities will develop all along the CPEC route to Western China and businesses focused on energy distribution and refinery will emerge to expand the local economy. “Complimentary benefits will come out of all these improvements,” adds Iqbal. “In time, people will assume a much more complimentary stance in moving CPEC policies forward as they see one success after another.”

CPEC Security

The China strategy expounds on another point – security. “Our cooperation in the security and economic fields reinforce each other, and they must be advanced simultaneously.” While security issues bind both countries, economic factors weigh in heavily. A successful CPEC brings Pakistan a stable economy under the wing of China’s economic juggernaut, facilitating vital economic goals for both. The advantages to aligning with the China economic miracle are viewed as the chance of a lifetime by many in Pakistan. Yet, how to balance contrasting sides of this equation becomes something Pakistan must consider in the near-term.

“Pakistan, for China, is now of pivotal importance. This CPEC has to succeed and be seen to succeed,” stated Mushahid Hussain Sayed, Chairman of the Pakistani parliamentary Defense Committee. This point was echoed by President Xi during the state visit, “We will build the China-Pakistan community of common destiny and set a fine example for such efforts between China and its neighboring countries.”

Plus, it seems clear that Pakistan will make sure no one interrupts the building of this Corridor. In a one-on-one exchange in Islamabad, President Hussain assured President Xi, “A special army security division will provide security for all Chinese involved with CPEC projects in Pakistan, taking effect immediately.”  Major General Asim Bajwa confirmed later that the support would include elite Rangers and a 10,000-troop army unit specially trained and dedicated to this purpose, with a two-star senior military officer in charge, reporting directly to General Headquarters (GHQ).

CPEC Framework

Pakistan is the crucial economic corridor linking the Arabian Sea part of the Maritime Silk Road on the one end to the land route silk road at Kashgar on the other end.  It is designed to bring an economic lift to Western China, as energy and trade goods are funneled through the CPEC from warm water port Gwadar in Pakistan to Kashgar in Xinjiang Province.

This entails a 3,000 km network of road, rail, oil and gas pipelines wired with fiber optic cables to connect both locations. Three routes – east, central and west – will all run the length of Pakistan to Islamabad, the start of the Karakoram Highway (KKH), the only road to Kashgar.

A dry port is being built on the Karakoram Highway inside the Chinese border, as a receiving and trans-shipment location. To the west of the highway is the closest warm water port access for Central Asia and that may one day connect on to Eastern Europe if needed. To the east the highway connects to China’s east coast.

On the opposite end of the route, Gwadar opens Central Asia and West China to trade with South Asia (from Burma to Iran), the Middle East, Africa and Europe. From a broad view, the CPEC will link some three billion people on three continents as a driver of economic growth. Though many projects will come on-stream in a few years, the entire CPEC plan will be fully operational by 2030 if all goes according to this ambitious plan.   

Ties that Bind

One of the primary goals of OBOR is the modernization and expansion of Western China’s economy. To that end, a state organized forum was organized in Urumqi, capital of Xinjiang Province, to create partnerships between Pakistani and Chinese companies. An August 2015 two-day event brought more than 300 officials and company delegates, think tanks and social organizations together for the first CPEC Forum. The meeting was held in oil rich Karamay in north Xinjiang. That mini summit alone produced 20 cooperation agreements worth US$1.6 billion and a “Karamay Manifesto” calling for regular meetings.

China is fully aware that fostering the Pakistan relationship can result in much more trade, even in the short-term. For instance, trade figures of US$147 million for 2014 between Pakistan and Xinjiang were far less than activity being registered with other neighbors to Pakistan. For one, Kazakhstan racked up trade of US$12.2 billion for the same time period. However, China-Pakistan cross border trade can only grow when better road systems from CPEC projects reach completion between both countries.

Chengdu is another critical point on the CPEC map. The starting point of the ancient Southern Silk Road, Chengdu has maintained economic and cultural ties through trade with Silk Road neighbors for centuries. Now, Chengdu is a sister city to Lahore, Pakistan. Friendship between Chengdu and Pakistan spans three decades of business cooperation and exchange in aviation, military industry, chemical engineering and machinery. It was in this city that Pakistan’s JF-17 jets were first developed.

Last October, the Western China (Sichuan) Import Expo and International Investment Fair saw a total of US$90 billion signed in investment contracts. The fair serves to expand trade and investment with western China in line with OBOR, Yangtze River Economic Belt and western development strategy initiatives. More than 2,400 companies from 34 countries, and 16 Chinese provinces attended the fair last year. A more Pakistani thrust is expected to take the stage in the next iteration of this Fair. 

Pakistan is indeed favorably placed to become a logistics hub for the huge trade volume expected to flow through CPEC. Business opportunities will be created within planned special economic zones while industrial parks and energy projects are being set up along the three routes threading across Pakistan. The service, infrastructure, industrial and transportation sectors are expected to get a boost as CPEC projects are implemented. In addition, Pakistan’s improved energy grid is primed for manufacturing and industrial sector operations China will set up soon. Other cooperation and planning is underway in the agriculture, finance and industrial sectors. These future developments are being anticipated to take full effect of CPEC with private sector companies leading the way.

Shanghai Business Review is the leading English language website and print magazine for business leaders conducting business in China.

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