China reasserts control over CPEC, disciplines Pakistan by halting funding for three infrastructure projects
The Chinese government has stopped funding three infrastructure projects in Pakistan under the China-Pakistan Economic Corridor (CPEC) programme. These three projects were included in the CPEC agenda in December 2016 and the final procedural formalities were pending.
The Chinese government stopped funding three infrastructure projects in Pakistan under the China-Pakistan Economic Corridor (CPEC) programme. These three projects were included in the CPEC agenda in December 2016 and the final procedural formalities were pending. However, recent reports mention that the funding may only resume once China releases new guidelines.
Pakistan authorities have mentioned that China is concerned over corruption in CPEC projects, which is ludicrous. The China Gezhouba Company Limited, developing Pakistan’s Neelum-Jhelum Hydropower Project, has been blacklisted by the World Bank for misconduct and corruption. Other Chinese companies are not beyond corrupt methods. In addition, China is not concerned with deteriorating law and order situation in Pakistan, rather, it believes that situation has improved in the past three years. Therefore, this deferment is nowhere related to corruption or law and order. Rather, prima facie, it seems to be a temporary measure to discipline Pakistan and reassert Chinese control over CPEC projects.
China agreed to fund $46 billion in Pakistan’s infrastructure development projects in 2015. A majority of these funds were earmarked for energy generation and connectivity. The CPEC’s ambit covered Gwadar Port Project and a special economic zone nearby, Gwadar International Airport and other highway projects. In addition, the reconstruction of Karakorum Highway, a number of thermal power plants such as Sahiwal Coal Power project and numerous highway projects are part of the development programme. A number of these power projects are part of the ‘Early Harvest’ scheme in which China aims to connect about 10,400 MW of electricity to Pakistan’s power grid, during 2018-2020.
China aims to score on two major fronts through the CPEC. First, by developing Pakistan’s frontier and less-developed, conflict-prone regions, China is incentivising good behaviour. China’s Xinjiang province has faced serious social disturbances where local ethnic Uyghur Muslims have violently clashed with the Han immigrants, supported by government forces.
In return, Chinese authorities have drastically curbed religious activities of Uyghurs in the entire province. The use of Islamic veil for women is banned, fasting during Ramadan for civil servants, party cadres, teachers and students is discouraged, minors are prevented from visiting mosques and the surveillance and control over common Uyghurs is pervasive.
Nevertheless, Uyghurs have remained dissatisfied with the Chinese rule and groups such as East Turkistan Independence Movement (ETIM) are major headache for China. China hopes that its CPEC projects will alleviate poverty in its border region with Pakistan and in turn, China will be able to prevent ETIM from gaining support there.
Second, China aims to create an alternative route to access its markets and resource-centres in West Asia and Africa, in addition to the Straits of Malacca. The Gwadar Port and major highway projects have consequently become prominent in the Chinese strategy. China can build an alternate route while utilising its excess capacity in steel, cement and other industrial production in Pakistan through CPEC.
However, the trajectory of CPEC has not been without hiccups and roadblocks. The Chinese project development culture, financing methods, labour policy and lack of transparency are major issues that have raised alarms in Pakistan’s political, economic and social circles. CPEC projects have remained completely under the control of Chinese companies and banks. The enthusiasm in Pakistan’s business circles have taken a visible dip as the project bidding, contracting and financing occur through Chinese companies. The machinery, construction materials and almost everything comes from China.
The financing of these projects is done through market-rate loans and equities. On Chinese equities in projects, Pakistan government has given the sovereign guarantee of 17-34 percent returns. The loans from Chinese banks are disbursed on six to seven percent interest rate and another seven percent insurance premium is charged in the first year itself, again by a Chinese insurance company. Therefore, the viability of these projects is gradually getting into red zones. Pakistan is expected to start repayment from 2020 but its fiscal deficit has increased and the balance of payment situation remains critical. The International Monetary Fund (IMF) has been warning Pakistan about its economic situation.
Additionally, every Chinese project in Pakistan is being mostly completed by Chinese engineers and labour. The immigrant Chinese labour has taken away jobs in a country with high unemployment. Moreover, Pakistan government has taken land from locals in Gilgit, Baltistan, Khyber-Pakhtunkhwa and Baluchistan in the name of development and jobs. However, Chinese companies have begun development without any significant local involvement, creating enormous dissatisfaction and tension.
The Gwadar Port Project has similarly run into problems. As per the Pakistan’s Senate report, China is set to get 91 percent of the revenue generated in the port while Pakistan will only get nine percent for next 40 years. The Senate has often been critical of the lack of transparency and predatory policy of Chinese companies.
Senators argue that Pakistan is getting the short-end of the stick in the Free Trade Agreement (FTA) with China. Pakistan’s value-added exports have not benefitted and the local industry has acutely suffered. The business community in Pakistan has sought their inclusion in formal agreements with China to prevent being left out from CPEC contracts. Gradually, China has begun facing loss of public perception in Pakistan where its companies are being compared with the East India Company.
The backlash has further led to Pakistan disagreeing with Chinese conditions for funding the Diamer-Bhasha hydropower project. Pakistan also rejected Chinese proposal of using Yuan as the official currency in Gwadar Port Free Zone, citing sovereignty concerns. A section of experts in Pakistan have argued that even non-Chinese companies will invest if similar conditions and guaranteed returns were offered to them. The Chinese predatory behaviour in Sri Lanka, Myanmar, Tajikistan, Laos and other countries further creates suspicion.
China cannot understand and tolerate this sudden growth of spine among Pakistan’s officials and politicians. Chinese experts have already differed over and questioned the CPEC’s feasibility in the past. The CPEC development offer to Pakistan was couched in China’s generosity and brotherly goodwill. China expected Pakistan to lap up any and every funding and development project, even on predatory conditions because according to China, Pakistan had no other option. Therefore, the loss of public perception, rejection of its proposals and Senate questioning irritates China.
Whenever China is irritated and angry, it tends to take these temporary punitive steps to bring the other party back to its senses and reassert complete control over the situation. Similar anger was expressed after Chinese citizens were killed in Pakistan. Moreover, China is not short of funds. It still holds around $ three trillion in American treasury bonds which fetch minuscule one percent interest rate, compared to six-seven percent rates on loans and 17-34 percent on equities in CPEC projects.
Therefore, China cannot afford to walk away from the CPEC where it has already invested substantially. Moreover, the original reasons of launching CPEC, geopolitically and financially, still remain valid. Pakistan’s role remains crucial to stabilise Xinjiang and China remains interested in Gwadar. Therefore, the current funding deferment is a temporary setback. China aims to stay in Pakistan for the long term.
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