China Pakistan Fall Out Over CPEC:Nikkei Asia

The Pakistani

Senator (1k+ posts)


KARACHI -- China and Pakistan are embroiled in their most serious disagreement relating to the Belt and Road Initiative, causing the annual bilateral summit of the China-Pakistan Economic Corridor (CPEC) to be delayed.

The Joint Cooperation Committee (JCC) is CPEC's principal decision-making body. It is jointly chaired by Pakistan's minister for planning, development and special initiatives and the vice chairman of China's National Development and Reform Commission.

The first JCC meeting was held in August 2013 and the last in November 2019. The 10th JCC was scheduled for early 2020, but remains postponed.


Initially, the COVID-19 pandemic was the reason, but later disagreements between the two countries over the Main Line 1 (ML-1) railway project and special economic zones became the main points of disagreement, Nikkei Asia has learned from informed sources.

Asad Umar, Pakistan's minister for planning, development and special initiatives, told local media in November that the 10th JCC would be held the following month. However, officials in the Planning Commission of Pakistan, who asked not to be named, recently told Nikkei that the meeting will not take place for at least three months -- by far the longest JCC gap to date.

ML-1 is the largest CPEC project and worth $6.8 billion. China is expected to lend $6 billion of this, which Pakistan wants to borrow at a concessional interest rate of less than 3%.



A passenger train passes through Karachi -- Pakistan is in urgent need of loans to upgrade its antiquated rail infrastructure. © Reuters
China offers a mixture of concessionary and commercial loans for such projects. This could significantly increase the aggregate interest rate Islamabad will face, according to the planning commission officials.

"China is reluctant to lend money for ML-1 because Pakistan has already sought debt relief to meet G-20 lending conditions and it is not in a position to give sovereign guarantees," Nasir Jamal, a senior journalist in Lahore covering business and the economy, told Nikkei. He said Beijing's appetite for lending money for large infrastructure projects has diminished because these projects are vulnerable to local politics that delay returns on investment for China. That has hindered agreement on the finance framework for ML-1.

Andrew Small, a senior trans-Atlantic fellow with the Asia program at the German Marshall Fund, a U.S. think tank, said China tends to base its decisions about interest rates for loans to Pakistan on a couple of criteria. Firstly, do low-interest rates encourage projects that do not make sense financially? Secondly, what precedents are set for other countries looking for similar concessions?

"China is much more comfortable deferring payments or providing new financing than it is offering concessional rates in the first place," Small told Nikkei. He said this approach provides Beijing with greater leverage and control even if they are willing to be very flexible at the back-end.

With host countries under pressure to repay at higher rates, China trades payment deferments in return for influence, which helps it get more favorable arrangements.



The delayed JCC meeting and unsettled ML-1 financial framework is complicating matters for Pakistan. Early this month, Pakistan Railways asked the government for 11 billion rupees ($69 million) to provide ML-1 security. Without the Chinese financing framework being agreed by the JCC, it is hard for Islamabad to come up with such a large amount given the state of the economy and severe budgetary constraints.

The other major disagreement between Beijing and Islamabad delaying the JCC meeting relates to SEZs. In the second phase of CPEC scheduled for 2020 to 2025, Chinese companies are due to start producing goods in Pakistan and exporting from there.

Currently, the industrial cooperation framework for the SEZs is limited to a memorandum of understanding without detailed modalities. Matters such as tax exemptions and requirements for employing local labor have not been finalized. These need to be agreed by China for confirmation at the JCC. The Board of Investment of Pakistan submitted the draft agreement for the industrial cooperation framework to the Chinese government last month and is still awaiting a response.



Prime Minister Khan, left, and China's Premier Li Keqiang leave a signing ceremony in Beijing's Great Hall of the People in November 2018. © Reuters
In December 2020, during a meeting of the Joint Working Group on Industrial Cooperation under CPEC, Asim Ayub, the project director for industrial cooperation at the Board of Investment, pressed for early signing of the industrial cooperation framework agreement.

The seriousness of the delay is clear from China's unprecedented reluctance to schedule a JCC meeting. In the past, JCCs were always held in time, and China agreed to Islamabad's requests most of the time. Some experts believe the delay is evidence that CPEC is derailing.

According to Small, there were plenty of announcements about CPEC last year, but actually setting deals in motion was another matter. "The optics do matter to China so I still expect them to figure out terms in the end, and certainly to keep some narrative of continued progress alive," Small told Nikkei. "But that doesn't mean they're willing to agree on something that doesn't make sense for other reasons just to speed things up a little."

Pakistan is currently renegotiating its $6 billion extended fund facility with the International Monetary Fund (IMF), which was suspended in April 2020. The IMF reportedly will only resume the program if Pakistan does not take out any new commercial loans, and that is one of the reasons it is looking for concessions on loans for the ML-1 project.



An important long-term implication of this case for other BRI countries could be that China will be more wary of lending to countries that have entered loan agreements with global lenders such as the IMF.

Hasaan Khawar, an Islamabad-based public policy analyst, views the situation from a different perspective. "The back-and-forth with China by Pakistan on the interest rate and additional guarantees for the ML-1 project is a good sign," he told Nikkei. "The Pakistani side is appraising the terms carefully and trying to negotiate a better deal."

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KKR

Citizen
I am In china and know the mood of Chinese regarding CPEC. Whatever said in this article is not true. CPEC is flagship program of China and they want to make it an example for the world as it is their first major strategic investment outside their borders. If they fail in CPEC, whole one-belt-one-road concept will flop. So, they can never backtrack from CPEC no matter what the cost.
 

Tit4Tat

Senator (1k+ posts)
I am In china and know the mood of Chinese regarding CPEC. Whatever said in this article is not true. CPEC is flagship program of China and they want to make it an example for the world as it is their first major strategic investment outside their borders. If they fail in CPEC, whole one-belt-one-road concept will flop. So, they can never backtrack from CPEC no matter what the cost.

it’s not only Chinese interests, we have to guard our interests too
 

Sohail Shuja

Chief Minister (5k+ posts)
5th generation media war!
No, it is not.

Pakistan and China are embroiled over the portfolio of the projects and their financial sense/utility. Pakistan's previous Government has already smoked up loans secured from China in useless projects like Orange line train. Now that white elephant is not able to pay off its own debt, lest providing any benefit to the public at large.

Further more, the agreement for ML-1 was also somewhat a grey matter. It provided some of the loan on less than 3% and other @ more than 9% commercial term basis. The overall yield was above 5% and moreover, after looking at what has been done to orange line train debt, Chinese are now evaluating that how will Pakistan be able to get some revenue out of such a project for its payback?

Furthermore, Dawood Razak seems keen on securing investments, rather than loans. He wants to build up national infrastructure through PPP partnerships, where the Govt does not secure a loan, but offers its infrastructure to be invested upon by the investor and then get his money back after its operation and hand over the infrastructure to Govt after his payment has been received with profit.

All these modalities, including the setback to global economy by COVID, plus the arm twisting of Pakistan by the Arabs and IMF has delayed things.

Yet, rest assured, CPEC is not going to roll back. Its a must for Pakistan and China.
 

miafridi

Prime Minister (20k+ posts)
CPEC is much more than just an investment from one country(China) to another country(Pakistan), and it has far reaching benefits for both our countries including security. so anyone saying that CPEC is in trouble just because one of them is worried about return on investment is very misleading.
 

miafridi

Prime Minister (20k+ posts)
No, it is not.

Pakistan and China are embroiled over the portfolio of the projects and their financial sense/utility. Pakistan's previous Government has already smoked up loans secured from China in useless projects like Orange line train. Now that white elephant is not able to pay off its own debt, lest providing any benefit to the public at large.

Further more, the agreement for ML-1 was also somewhat a grey matter. It provided some of the loan on less than 3% and other @ more than 9% commercial term basis. The overall yield was above 5% and moreover, after looking at what has been done to orange line train debt, Chinese are now evaluating that how will Pakistan be able to get some revenue out of such a project for its payback?

Furthermore, Dawood Razak seems keen on securing investments, rather than loans. He wants to build up national infrastructure through PPP partnerships, where the Govt does not secure a loan, but offers its infrastructure to be invested upon by the investor and then get his money back after its operation and hand over the infrastructure to Govt after his payment has been received with profit.

All these modalities, including the setback to global economy by COVID, plus the arm twisting of Pakistan by the Arabs and IMF has delayed things.

Yet, rest assured, CPEC is not going to roll back. Its a must for Pakistan and China.

You summed it up very well.
 

Sonya Khan

Minister (2k+ posts)
Beneficial news for Pakistan by a foreign agency ........ Khan can use this pressure on China to negotiate soft loans .....
We need to be independent of pressure..... Be it KSA , USA or China ......
 

KKR

Citizen
it’s not only Chinese interests, we have to guard our interests too
Because Chinese cant afford to see CPEC fail so it gives us an opportunity to negotiate on our own terms and protect our interests. Since CPEC has started China is giving Pakistan a blanket protection (military, financial, diplomatic) just to make CPEC a success. We are getting more than what China is getting from us in CPEC. So please be assured that our interests are protected.
 

The Pakistani

Senator (1k+ posts)
Because Chinese cant afford to see CPEC fail so it gives us an opportunity to negotiate on our own terms and protect our interests. Since CPEC has started China is giving Pakistan a blanket protection (military, financial, diplomatic) just to make CPEC a success. We are getting more than what China is getting from us in CPEC. So please be assured that our interests are protected.
That what our Crock Leaders should understand, Pakistan should be the one who set the terms not china, if the CPEC is a chinese bloodline.
 

Shahid Abassi

Minister (2k+ posts)
Our friendship aside, N-league has done some horrible business with the Chinese. The coal-based power generation has ruined us and the circular debt is increasing by billions, only because the Nawaz government agreed to some tariffs which were twice as high as India was paying to its investors. Now ML1, look at India how they got financed their fast train with Japanese money on zero interest while we are fighting for 3%. I think it is a food for thought that why can't we even build roads and lay a train track ourselves. Is it the cost? then start building a smaller portion every year. Spend one billion dollars a year and do it yourself in 10 years.

One must understand the Chinese mentality. They do not treat you financially any better because you call it a friendship sweeter than honey, higher than the Himalayas, and deeper than the sea.
Whatever they are doing is for their own good and for their own gains.
 
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