As owner of Gwadar Port, Pakistan may be the boss, not the beggar

As has been widely reported, Pakistani Prime Minister Imran Khan’s hopes for a helping hand from “all-weather friend” China were dashed as he had to return empty-handed from his recent official visit to Beijing. Yet as almighty China finds itself increasingly isolated over its militarization of the South China Sea, Pakistan has an ace up its sleeve: Gwadar Port.

With less than US$8 billion in foreign reserves, enough to pay for just seven weeks’ worth of imports, and a ballooning balance-of-payments crisis despite a $6 billion bailout package from Saudi Arabia, Pakistan was counting on China for further assistance. Thus it was hard for Pakistanis to accept the reality – as few had ever thought that it could happen someday – that China ignored Pakistan’s call for aid by saying that more talks were needed before it extended any monetary help.

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Islamabad’s friendship with Beijing has always been termed as “higher than the highest mountain and deeper than the deepest ocean, and sweeter than honey.” But it seems that the love between two is one-sided, that is, from the side of Islamabad.

According to the 2,970-word China-Pakistan joint statement after Khan’s visit, China’s administration had enough time to discuss with Pakistan their political and strategic relationship, the China-Pakistan Economic Corridor (CPEC), mutual trade and investment cooperation; marine, science and technology, space, environmental and agricultural cooperation; social sector cooperation; people-to-people and cultural linkages; defense, security and counterterrorism cooperation; and international and regional issues, but needed more time to discuss details of any possible bailout package.

Chinese Vice-Foreign Minister Kong Xuanyou said, “As for the specific [financial aid] measures to be taken, the relevant authorities of the two sides will have detailed discussions.” Furthermore, the communiqué made no mention of a possible bailout package.

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At the Great Hall of the People in Beijing, Khan and Chinese Premier Li Keqiang (pictured above) signed 15 agreements and memoranda of understanding (MoUs) for cooperation in agriculture and industrial development, poverty alleviation and technical training; also the Chinese administration pledged to help Pakistan in establishing special economic zones.

Is seems that deep inside, the relationship between the “iron brothers” is more intense than how Pakistani Finance Minister Asad Umar tried to portray during a press briefing, when he said, and the Dawn reported, that China was committed to providing short-term relief to Pakistan, the modalities of which would be discussed in a new round of discussions.

According to Naya Daur, an online media outlet in Pakistan, during Khan’s visit, he was shown by the Chinese administration the “controversial” statements given by his ministers about CPEC, and Beijing raised its concerns over such a behavior.

During Imran Khan’s visit, he was shown by Chinese administration the ‘controversial’ statements given by his ministers about the China-Pakistan Economic Corridor, and Beijing raised its concerns over such a behavior

The Chinese might have been referring to an interview Razak Dawood, the Pakistani cabinet member responsible for commerce, textiles, industry and investment, gave to the Financial Times in September, which disclosed how Imran Khan’s government actually viewed the so-called “win-win” partnership with China.

Dawood clearly said in his interview that the previous government negotiated CPEC deals in the worst possible way with Chinese, and therefore it gave away a lot to them. He added, “I think we should put everything on hold for a year so we can get our act together.… Chinese companies received tax breaks, many breaks, and have an undue advantage in Pakistan; this is one of the things we’re looking at because it’s not fair that Pakistani companies should be disadvantaged.”

This particular interview – which exposed the dark side of multibillion-dollar CPEC project – seems the only reason behind China’s unexpected behavior with its “iron brother” Pakistan, and unfortunately Khan returned empty-handed from Beijing.

However, although China seems to be the main beneficiary of the CPEC mega-project, it is not that simple. The terminus of the economic corridor is Pakistan’s own Gwadar Port, which could prove to be China’s salvation if conflict in the South China Sea disrupts its trade routes, especially its access to energy resources.

That being the case, Pakistan should be acting more like a boss, and less like a beggar.

Gwadar Port in Pakistan will prove to be the last resort for China’s survival if a war erupts in the South China Sea. It will act as the only shock absorber by giving China access to the Persian Gulf for crude-oil imports. An area covering about 3.5 million square kilometers – rich in oil and natural-gas reserves – of the South China Sea has been under dispute as China, the Philippines, Vietnam, Malaysia, Taiwan and Brunei have all claimed sovereignty over this territory.

Because $1.2 trillion worth of US trade passes through the South China Sea, Washington wants it to remain as part of international waters and therefore it is also involved indirectly in the conflict. In 2016, almost 80% of China’s oil imports passed through this route via the Strait of Malacca. Also, it meets 50% of its oil demand through imports from the Middle East.

For an oil-hungry country like China, a long-term closure of South China Sea routes – for one reason or the other – would present a worrisome economic and political scenario.

Pakistan will always have leverage during any sort of negotiation with China on the CPEC matter. The Chinese government should keep one thing in mind: If a war erupts in the South China Sea, its citizens will starve and its economy will end up in tatters if Pakistan denies it access to Gwadar Port

Pakistan will always have leverage during any sort of negotiation with China on the CPEC matter. The Chinese government should keep one thing in mind: If a war erupts in the South China Sea, its citizens will starve and its economy will end up in tatters if Pakistan denies it access to Gwadar Port. And Pakistan will never forget how China refused to pull it out of the current balance of payments crisis – a crisis for which China and only China is responsible.

Chinese Vice-Foreign Minister Kong Xuanyou told reporters that there would be no change in the number of projects under CPEC. If there were, it would only be to increase, not decrease, the number of projects. However, the scope of the project tilt in favor of people’s livelihoods. This sounds more like a warning than a normal friendly statement.

Also don’t forget what Chinese Foreign Ministry spokesman Lu Kang said in October at a press briefing in Beijing. On one hand, he endorsed Pakistan’s request to the International Monetary Fund (IMF) for financial assistance, but he shockingly also cautioned that the facility should not affect economic cooperation between Islamabad and Beijing.

These statements show that China is in no mood to make any sort of compromise on the $62 billion CPEC project, and whenever the Xi Jinping administration notices Islamabad rethinking dollar-wasting CPEC projects – which indeed it should do – it reveals what it actually they has in its heart.

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According to the joint statement issued at the conclusion of Khan’s maiden visit to Beijing as prime minister, both China and Pakistan will further expand cooperation under CPEC; also they reaffirmed their commitment to the mega-project, which is a “win-win” enterprise for the entire region and would bring regional prosperity and development through enhanced connectivity.

China’s debt-trap diplomacy

Before CPEC was initiated in 2013, Pakistan’s trade deficit with China was less than $5 billion, but unfortunately – and fortunately for China – it kept surging after work on the billion-dollar project began.

According to a report by the State Bank of Pakistan titled “Dynamics of  Pakistan’s Trade Balance with China,” the volume of Pakistan’s bilateral trade reached $13.8 billion in fiscal year 2016, up from $2.2 billion in FY05. However, the bilateral trade balance remained tilted in China’s favor, as Pakistan’s exports to China could not keep pace with its imports from the country. Pakistan’s exports to China increased from $400 million in FY05 to $1.7 billion in FY16. As against this, imports from China grew exponentially, from $1.8 billion in FY05 to $13.9 billion during the July-May period of FY17 (see graph in Tweet post below). In fact, Pakistan’s top imports come largely from China, with the exception of oil.

Pakistan’s exports to China increased from US$ 0.4 billion in FY05 to $1.7bn in FY16. As against this, imports from China grew exponentially – increased from $1.8bn in FY05 to $13.9bn during FY17. In fact, Pakistan’s top imports come largely from China with the exception of oil. pic.twitter.com/HWLSyc1mdI

— Ali Salman Andani (@an_alisalman) November 11, 2018

The rise in imports from China is mainly attributed to the surge in machinery and equipments in the backdrop of so-called development activities – also called CPEC – in Pakistan.

In CPFTA, the China Pakistan Free Trade Agreement of 2007, Pakistan reduced tariffs to zero on its imports of Chinese electric and electronic products, machinery, chemicals and many other items. In this way China got a huge advantage, first when the agreement was signed, but mainly after construction of infrastructure and energy projects under CPEC started because of the humongous increase in its machinery exports to its  “all-weather friend” Pakistan.

At the same time, it ballooned Pakistan’s trade deficit with China. The country is currently facing a balance-of-payments crisis, with a nearly $18 billion deficit, according to the latest figures from the State Bank of Pakistan. Remember, in CPFTA, China offered no tariff concessions on its imports of Pakistan’s fish, cotton, paper, plastic and textile items.

Machinery imports alone from China in the first two years of the CPEC project raised Pakistan’s current-account deficit by 50%

For Pakistan, the situation seems alarming. China forces it to buy Chinese equipment for use in Chinese projects, shredding its reserves; then it extends Pakistan loans to cover the purchases, which increases the debt burden on Pakistan’s economy. Machinery imports alone from China in the first two years of the CPEC project raised Pakistan’s current-account deficit by 50%.

China simply doesn’t want the world to know its sinister objective of looting the key national assets of less developed economies after drawing them into a debt trap.

From Pakistan to Montenegro, from Laos to Kyrgyzstan, many nations owe huge debts to China.

During an interview with Bloomberg (video below) in April, Malaysian Prime Minister Mahathir Mohamad warned Chinese investors that they would face tougher scrutiny he won back power in the upcoming election – which, indeed, he did.

On November 7, an IMF team arrived in Islamabad for negotiations with the Khan administration on a possible bailout. According to Dawn, the talks are expected to last until November 20. Last Thursday, the team met with officials of the Ministry of Planning and Power Division and unfortunately a $9 billion discrepancy surfaced between the figures quoted by Islamabad and Beijing on the cost of ongoing and completed projects.

While briefing media in October, according to Express Tribune, Chinese Ambassador to Pakistan Yao Jing said the 22 CPEC power projects that had been valued at $19 billion were either under consideration or had been completed. But according to the Pakistani Ministry of Planning, the cost of 22 ongoing and completed projects is $28.6 billion.

An official of the Planning Ministry on condition of anonymity told Express Tribune that the Chinese Embassy in Pakistan was not including the Kohala power project, the 300-megawatt Gwadar Power Plant, and the Oracle power plant among the ongoing schemes.

This has given birth to doubts about CPEC. Also it seems that the Chinese are trying their best to portray the very-high-cost CPEC project as “not so costly.”

On November 9, Imran Khan, while presiding over a parliamentary meeting of his Pakistan Tehreek-e-Insaf party, said that China had “barred” his government from disclosing the amount of financial assistance given to Pakistan.

The day before, on November 8, Chinese Foreign Ministry spokeswoman Hua Chunying (below) said Beijing would provide assistance to Pakistan to the best of its capacity. “In future, in the light of Pakistan’s needs and by the mutual agreement, we will continue to offer our help economically and also in the sector of people’s livelihood,” she added.

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As usual – and just like every other Chinese official – she didn’t miss the opportunity to talk about China’s intentions to expand CPEC: “The two sides will move the China-Pakistan Economic Corridor forward to expand projects under this flagship project.”

A high-level delegation from Pakistan that included the secretaries of finance, trade and planning, as well as the governor of the State Bank of Pakistan, left for China last Thursday to “discuss” potential financial aid with the Xi administration. But still no one from Khan’s cabinet –including him – has still confirmed the details of a Chinese bailout to suffering Pakistan.

If China has provided Pakistan with certain financial aid – which according to Khan is unprecedented – what has it asked in return? Most likely it seems that President Xi Jinping has asked the South Asian “all-weather ally” to prohibit its ministers from issuing “controversial” statements about CPEC and to make efforts to portray a positive image of the multibillion-dollar project. Xi may also want the Khan administration not to raise objections on further expansion of the “win-win” economic corridor.