PESHAWAR- Chinese companies are taking over major businesses in Pakistan’s export-led manufacturing sector, the profit-making heart of the nation’s $276 billion economy.
As rising Chinese investment promises to boost Pakistan’s ailing economy in an hour of need, there are concurrent nationalistic concerns expressed by local businesses and groups that Chinese investors are cornering key local industries, state assets and businesses to the detriment of Pakistani players and interests.
The United Nations Conference on Trade and Development’s World Investment Report 2020 indicates that foreign direct investment (FDI) in Pakistan increased from US$1.7 billion in 2018 to $2.2 billion in 2019, with accumulated FDI of $34.8 billion at the end of that year.
China is by far the biggest contributor of FDI to Pakistan, the report concluded. The Pakistani government disaggregates Chinese investment related to the $60 billion China-Pakistan Economic Corridor project, a key plank of China’s state-driven Belt and Road Initiative (BRI), and non-CPEC-related investments.
Analysts say non-CPEC Chinese private investment in Pakistan is increasingly driven by cheap labor and securing access to raw materials that are shipped back to China’s factories. China is also building factories in Pakistan to export finished goods directly to European markets Beijing hopes to more readily reach via its BRI infrastructure investments.
Chinese investors are also poised to buy into various loss-making state-owned enterprises (SOEs) that the government has indicated it is keen to sell. SOE-related losses recently hit 1.5 trillion rupee ($9.4 billion) mark, more than the country’s annual defense allocation.
Chinese capital is thus warmly welcomed in government circles. Ishrat Husain, a government adviser on institutional reforms, said last year that the government planned to sell stakes in state-owned Pakistan Railways (PR), Pakistan International Airlines (PIA) and Pakistan Steel Mills (PSM), among others, to foreign investors. China has emerged as one of the few bidders for the ailing SOEs.
However, not all Pakistanis are pleased with all the Chinese asset buying and building.
Muhammad Ishaq, a leading industrialist and former member of the Khyber Pakhtunkhwa Board of Investment and Trade (KPBIT), told Asia Times that resentment is building to Chinese investors’ preference to establish fully-controlled businesses rather than form partnerships or joint ventures with local businesses.
He said that all Chinese investments in the country should involve chambers of commerce and abide by local business “ethics.”
“In the case of Chinese investment, the local business community was neither consulted nor taken into confidence,” he said about the recent surge in wholly-owned Chinese ventures in the country, adding that small local businesses should have been more involved in Chinese investments.
Official corporate data shows more than 2,000 Chinese business entities have registered in Pakistan, half of them in the capital Islamabad. The data shows their investments reach well beyond the scope of the state-led CPEC, which focuses mainly on infrastructure development including roads, ports and power plants.
Chinese trade and industrial concerns are operating throughout the country, with joint and wholly-owned interests in textile factories, cement plants, power producers, steel mills, housing projects and telecommunication concerns, the Pakistan-China Joint Chamber of Commerce and Industry’s (PCJCCI) website shows.
Unconfirmed reports, compiled by Pakistan’s corporate sector and reviewed by Asia Times, put the number of Chinese businesses much higherat over 5,000, including a growing number of unregistered ventures in Pakistan’s informal sector.
“We have serious reservations about the growing Chinese business involvement in Pakistan, which mostly benefits the Chinese side because they run most of the business all by themselves,” Ishaq said.
He claims that many Chinese companies do not register with Pakistani tax authorities and thus do not pay taxes, putting local businesses at a competitive disadvantage. Others claim private Chinese businesses hide behind the CPEC’s special tax exemption to evade paying taxes on unrelated businesses.
Even though exempt, CPEC membership requires participating companies to acquire a national tax number (NTN) and sales tax registration. The PCJCCI did not respond to Asia Times’ repeated request for comment on the tax evasion accusation.
Official or unofficial, Chinese investment is unmistakably transforming Pakistan.
When Beijing extended the reach of its BRI to Pakistan in 2015, Chinese state-owned companies established an initial foothold by acquiring the Karachi Stock Exchange and K-Electrics, a Karachi-based energy production and distribution company.
In the energy sector, Chinese companies are now involved in the construction of 27 CPEC-related power projects and six non-CPEC projects, investments that should help to address chronic national power shortages.
Those include Power China’s construction of the 1.4 trillion rupee ($8.8 billion) Diamer Basha Dam in a joint venture with the Frontier Works Organization, a construction wing of the Pakistan army. The 4,500 MW project is due for completion in 2028.
The Chinese state-own Changan Automobile Company, meanwhile, is setting up a $136 million car assembly plant in Karachi in a joint venture with Pakistan’s Master Group of Industries. The project will roll out 30,000 Alsvin models annually.
Chinese private interests are also investing heavily in textile production, a sector that contributes 8.5% of gross domestic product (GDP) and employs 45% of the total industrial labor force.
In Punjab, the Shanghai Challenge textile company recently acquired a 25% stake in Masood Textile Mills Faisalabad, a hub of Pakistani clothing and textile manufacturers. Challenge Apparel, a subsidy of Shanghai Challenge Textile Company, operates a Faisalabad-based plant supplying garments to Adidas and Puma for US and European markets.
Challenge Apparel is also developing the Lahore Apparel Park at an estimated cost of $1 billion. Officials say the park will earn $300 million to $500 million in exports when it commences operations later this year.
Proposed Chinese investments in beleaguered SOEs, including Pakistan Airlines (PIA) and Pakistan Steel Mills (PSM) threaten to stoke nationalistic fires.
The government has recently denied any sales are imminent, likely in response to rising labor resistance. Labor groups have already taken to the streets to protest retrenchments at the two SOEs. In apparent response, authorities have suggested they would instead restructure the struggling SOEs into different autonomous business lines.
Several Chinese conglomerates have reportedly approached the Privatization Commission (PC) to express interest in bidding on distressed state assets.
Reports suggest that China’s Metallurgical Construction Corporation (MCC) has shown interest in acquiring PSM outright with a $2.2 billion expansion and modernization plan. Total losses and liabilities at PSM’s mills have spiraled beyond 500 billion rupees ($3.1 billion).
MCC reportedly plans to set up a new steel plant in a proposed first phase, two-year $1.2 billion expansion project. In a second phase, MCC would seek to modernize PSM’s existing plant for $1 billion over another two years. The MCC is already running a copper mine in Pakistan’s restive Balochistan province, through which the CPEC passes.
That proposal is already being resisted as local groups lurch towards anti-Chinese messaging. Industrialist Ishaq said, “The government should have given preference to small and medium enterprises (SMEs) over the large-scale manufacturing (LSM) units.
“The transfer of technology and investment in small businesses would have strengthened the industrial base of the country and employment opportunities created for the jobless youth.”
In April last year, the PC submitted due diligence details of PSM’s human resources, finances and taxes owed to the Pak-China Investment Company (PCIC), a joint development finance institution set up to promote trade and investment by the Bank of China (BoC) and Pakistan government.
A team from China’s Sinosteel has recently been on a visit to Pakistan to evaluate PSM’s operations. Some suspect the government was acting at Sinosteel’s behest when it announced last year it would fire 8,000 workers in an 18.7 billion rupees ($117 million) “human resource rationalization plan.”
Similar speculation surrounds PIA. In December, the government announced a voluntary separation scheme for 3,500 PIA employees. Reports said the government plans to retrench half of PIA’s 14,500 staff to trim its employee-per-aircraft ratio.
The move came around the time Qiao Song, managing director of China’s state-run aviation company Sibol China, visited Islamabad to discuss possible investment in PIA. Analysts believe once the government cuts staff and disposes of non-performing assets, the PC will put PIA up for sale to Chinese investors.