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Posted at: Mar 23, 2017, 12:22 AM; last updated: Mar 23, 2017, 12:22 AM (IST)

The Chinese way

Be it Sri Lanka or Pakistan, China’s own business interests are first
The Chinese way
Self-service: Only Chinese investors would be allowed in SEZ under the CPEC.

PRESIDENT Mahinda Rajapakse of Sri Lanka evidently believed that China was a 21st century incarnation of Santa Claus. He turned to China to convert his constituency into a ‘South Asian Singapore’ by encouraging the Chinese to invest heavily in projects ranging from the Hambantota Port to a power plant, an airport, a cricket stadium, and a sports complex, while later demanding land for an industrial park. As things turned out, hardly any ships visited Hambantota. Hardly any aircraft landed at the airport. The stadium and sports complex remained unused. There were hardly any consumers for the power generated. The Sri Lankan government also faced riots while seeking to acquire land for a Chinese industrial park to produce Chinese products for export!

Unable to repay its debts to China, Sri Lanka is handing over the power plant, Hambantota Port and possibly the airport to Chinese control in a debt/equity swap. China would then achieve a major objective in its One-Belt One-Road project, of having a strategic presence on Sri Lankan soil, through its professions of offering ‘economic aid’ with no strings attached. Thanks largely to such Chinese ‘aid’, Sri Lanka now spends 90 per cent of all government revenues to service debts. If Sri Lanka was ecstatic about the prospects for future prosperity when the Hambantota Port project was announced, Pakistan’s two centres of power — the army and the government — have created euphoria and great expectations of accelerated growth and prosperity through the China-Pakistan Economic Corridor (CPEC).

The CPEC is to be undertaken exclusively by Chinese companies and banks, with an estimated investment of $55 billion. The plan is to construct Chinese-funded infrastructure projects including the Gwadar Port, road and rail communications networks, energy, industrial and military projects designed to showcase Beijing’s commitment to long-term economic and strategic engagement with Pakistan. The CPEC has a definite military component. A secure fibre-optic link connecting Kashgar in the Xinjiang/Uighur Autonomous Region with the Pakistan army’s GHQ in Rawalpindi is being laid at a cost of $44 million. 

The CPEC simultaneously seeks to economically and strategically bind Pakistan to China. Power generation, transport, commerce, R&D and the defence of Pakistan, all will be increasingly tied to Chinese investment, supplies and interests. The Pakistan army has raised a 10,000-strong division for the security of Chinese personnel working on the project. The entire project is premised on the belief that the Chinese-built Gwadar Port on the Makran Coast of Balochistan will emerge as a major industrial hub and naval base. Given the realities in and surrounding Pakistan, Gwadar will almost exclusively be a strategic naval base for China and Pakistan astride the Straits of Hormuz, with limited prospects of commercial use. 

The initial euphoria in Pakistan created by the armed forces was because they see the project as setting the stage for receiving more missiles, fighter aircraft, submarines and frigates. The besieged Nawaz Sharif government saw the project as a political godsend. It claimed that it would lead Pakistan to immediate progress and prosperity. This is now leading to doubts about the project, with a total lack of transparency and realism about the terms and conditions. Inter-provincial rivalries have also risen, with concerns that the prime beneficiary of the project will be the dominant Punjab province, with little or no economic benefit for the already alienated people of Balochistan.

Studies by Pakistani analysts have led to some startling conclusions. With a substantial portion of the Chinese investments focused on power projects, the viability has been examined based on interest rates charged by China Development Bank and China EXIM Bank. Official documents have revealed that with an estimated debt-equity ratio of 75-25 per cent, the cost of borrowings could surge to 13 per cent by including insurance costs, as the China Export and Credit Organisation charges 7 per cent fee on insurance for power projects. Interestingly, China is providing concessional finance for only 3-5 per cent of the project. The entire Chinese approach, as always, is crassly mercantilist. 

Pakistan government sources from its Planning Commission, which oversees CPEC projects, have averred that only Chinese investors would be allowed to invest in special economic zones under the CPEC. There is no provision to protect Pakistani business interests. Moreover, there are no assurances that the Chinese would utilise Pakistani labour in any meaningful manner in these projects. The chairman of the Pakistan senate’s committee on the CPEC, Senator Syed Tahir Hussain Mashhadi, has observed that he is not clear what benefits Pakistan derives from the CPEC, adding: ‘China is our brother but business is business.’ Referring to the absence of clarity on benefits for Pakistani labour and business, he noted: ‘Where will the benefit be for Pakistan? Will the Chinese give us some share of the profit? We are informed that Chinese banks charge us more interest than any other international bank.’

India has already made its objections to the CPEC clear. It is a project that enters Pakistan through the PoK, disregarding the fact that New Delhi considers this as part of its territory. One has, however, to analyse China’s economic compulsions in building such a vast road, rail and maritime network across the Eurasian landmass. Over the past four decades, China has undertaken construction activities of buildings, roads, rail lines, bridges, ports and dams, at a pace unprecedented in history. That activity is now slowing down, resulting in the country being left with a surplus labour force and unusable machinery. What better way to use these surplus capacities in a commercially viable manner than undertaking projects like Silk Road Economic Belt that links China with Central Asia, PoK, Persian Gulf States, Russia and the Baltic states. Moreover, Beijing’s 21st century Maritime Silk Route, in turn, extends from China’s coast to Europe, through the Indian Ocean. China is simultaneously building ports across the Indian Ocean, in Asia and Africa.

Despite these developments, Pakistani friends one met recently appeared convinced that given its strategic compulsions, China would agree to write off Pakistan’s debts. What impact such a write-off would have on similar Chinese loans elsewhere remains to be seen.


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