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Report

Returning to the Shadows: China, Pakistan, and the Fate of CPEC

September 23, 2020

The CPEC Slowdown

The troubles faced by the China Pakistan Economic Corridor (CPEC)—the flagship of China’s Belt and Road Initiative (BRI)—are perhaps the most conclusive demonstration that the BRI model that has been in place for the last few years is no longer sustainable. Even before the coronavirus pandemic, CPEC had stalled. Not only are the figures commonly cited for the total package of projects under this framework since its launch in 2015—which run as high as $62 billion—no longer accurate, investments of that magnitude are not under consideration either. The projects that are already underway or that have been completed are far from negligible, however. CPEC represents a marked expansion of China’s economic presence in Pakistan, with approximately $25 billion in investments to date—but this is already pushing close to the framework’s limits rather than the foundations of a more ambitious plan. 

Ahead of a visit by the Chinese leader, Xi Jinping, CPEC has ostensibly been going through a modest revival. This will see the addition of a couple of hydro-electric power plants and the upgrading of the ML-1 railway line between Karachi and Peshawar. But the pandemic has further weakened Pakistan’s already poor economic situation. Islamabad is embroiled in renegotiations with China over doubling the payback period on the existing CPEC energy projects and addressing its worsening debts. While CPEC may be a partial beneficiary of the immediate need for spending to revive the struggling economy, the government’s financing capacity has diminished significantly. 

In the coming years, the CPEC agenda will therefore largely be focused on completing investments that have already been agreed (including around Gwadar port), moving ahead with considerably slimmed-down plans for special economic zones, and identifying small additions that fit the current Pakistani government’s agenda, such as socioeconomic projects. This is a change in scale from the aspirations that once characterized the scheme, which one Chinese official characterized as moving from “mega projects” to “peanut projects.” 

Some elements of this rebalancing of CPEC had always been envisaged. The shift away from heavy capital investment in a second phase was a feature of the original plans. Yet, up until late 2017, it was anticipated that a far more expansive array of projects would be in motion, and that industrial cooperation between the two sides would also have taken off. Without the latter in particular, CPEC will fall far short of its transformative intentions.

CPEC’s Troubles 

Several factors contributed to the downgrading of ambitions for CPEC by Pakistan and China. It has been hit on three fronts—economic, political, and strategic. 

Economic considerations are primary. Pakistan’s fiscal and balance-of-payments situation means that the fullscale version of CPEC is not financially viable. 

Political factors have also contributed to CPEC’s fading fortunes. As has been the case in other BRI countries, when CPEC was initiated it was perceived to be closely tied to the agenda of the government of the day— led by Prime Minister Nawaz Sharif of the Pakistani Muslim League—rather than being rooted in a broader national consensus. Opposition parties, swathes of the business community, and—critically—the army had reservations about how CPEC was being conducted, even if they supported the general concept.

For its part, China has been skeptical about the Pakistan Tehreek-e-Insaf government led by Prime Minister Imran Khan that took office in 2018, compared to the warm relationship it enjoyed with Sharif. But Chinese concerns go further. Beijing has been burned by the politicization of its presence in Pakistan that CPEC induced, having previously sat seemingly untouchable above the country’s political fray. Even as the two countries find their way to a better footing for the relationship again, Beijing is unlikely to repeat the experiment of the vastly expanded level of economic and political engagement that characterized CPEC’s early years. 

The strategic context has also shifted. As a result of its worsening relations with the United States and the shock of the 2017 Doklam crisis, China sought to stabilize ties with India, which necessitated a discreet backing away from the comprehensive upgrade in its relationship with Pakistan that was evident from 2015 to mid-2017. CPEC has also become a factor in the wider rivalry between Beijing and Washington, with the United States taking a far more critical approach to the initiative in the last year. At every turn, CPEC has been bound up in geopolitical tensions rather than functioning as a “neutral” economic and developmental initiative. With the Sino-Indian relationship heading in a far more adversarial direction after the recent Ladakh clash, this is only likely to accelerate.

Ordinarily, the result of all these developments would simply be for CPEC to slow down quietly and proceed on a more economically and politically sustainable trajectory. Yet the controversies around CPEC, and its elevated position as the flagship of Xi Jinping’s signature foreign policy initiative, necessitate a public narrative of progress and success. CPEC’s reputation has become as important as the substance of any of the projects, and the two sides will take the steps required to maintain that, even if their private assessments of its prospects are more pessimistic.  

CPEC’s Legacy 

CPEC will nonetheless leave an important legacy for Pakistan, for the country’s relationship with China, and for the BRI.

Pakistan

The shrinkage of CPEC means that the financial risks—which many other BRI countries face—have been diminished for Pakistan. Loans, sovereign guarantees, and imports related to CPEC have contributed to Pakistan’s overall debt and current-account troubles but they are far from the principal factor in its economic distress. While CPEC will not be the game-changer for the Pakistani economy that its supporters once hailed, it is not a debt trap either. This picture could change if there is injudicious selection of new projects designed around maintaining the CPEC narrative rather than Pakistan’s economic needs but the two sides have so far been more cautious on debt-financing than has been seen elsewhere on the BRI.  

CPEC is adding new physical infrastructure, including road upgrades and power stations, the latter being the overwhelming focus of its first phase. Some of these have already been completed and the total energy package should add at least 14,000 MW to the national grid. Yet, in the absence of reforms to the power sector, even this most effectively executed part of CPEC is likely to be tainted by problems of high electricity pricing and “circular debt.”

Other parts of CPEC have moved more slowly. While there has been progress connecting Gwadar by road to the country’s interior, essential construction around the city and port itself is years behind schedule, and none of the questions about its economic viability have gone away. 

There will likely be at best a handful of special economic zones created, and the process around them has been sluggish. These were once intended as the centerpiece of CPEC’s second phase and as the part of the investment package that would generate exports, jobs, and broader industrial cooperation between the two sides. Instead, opposition from Pakistani business means that the special economic zones are taking the form of smaller pilot projects.

Some supposed features of CPEC always existed more in the realm of speculation rather than in any concrete plans. In particular, despite the use of the term “corridor,” it was never intended as a serious cross-border artery, and there are still no plans for railways, pipelines, or even large-scale road traffic between Pakistan and China. 

While it represents a far smaller financial volume than the other elements of CPEC and is far less visible, China’s technological involvement in Pakistan may ultimately prove to have a more lasting impact, as Beijing takes on an ever-more dominant role in the country’s digital architecture. This runs from the new Huawei fiber-optic cables and “‘safe city” projects to remote-sensing satellites and Pakistan’s involvement in the Beidou satellite navigation system.

The Sino-Pakistani Relationship

CPEC was supposed to lead to an upgraded and more comprehensive relationship between China and Pakistan, transcending their longstanding narrow security ties. Some of the broader interpersonal linkages— educational, cultural, political, and otherwise—that have developed around CPEC will persist, but greater mutual exposure has not necessarily had a benign effect. Differences and irritations that were easier to smooth over when the relationship was managed by a small cast of individuals on the two sides have assumed greater prominence.

The problematic domestic and international repercussions of CPEC have re-emphasized the limits of the Sino-Pakistani relationship. It has become clear that trying to do too much in the economic sphere may even weaken cooperation on the security issues that matter most to both countries if it results in political tensions. As a result, China is slimming the relationship back to what it has traditionally prioritized, rather than hoping that its investments can be a catalyst for economic change in Pakistan or a rebalancing of the country’s strategic outlook.

This means a doubling down by China on the military and security front in terms of the focus of the relationship and the way it is managed. It has reverted to using the Pakistani army as its principal interlocutor, including relying on it to deal with various political and economic issues that had previously been the prerogative of the civilian government. In part, this is also an adjustment by Beijing to the Pakistani army’s reassertion of a more dominant role for itself in the country. The fact that the CPEC authority is now chaired by a retired general vividly reflects this. 

The result is that Sino-Pakistani relationship of the future is likely to look more like that of the past than the version that emerged after the launch of CPEC in 2015. Deep security ties will persist, and even intensify as the Sino-Indian relationship deteriorates, but without the scale of broad-based economic and political engagement that characterized the last few years. 

The negative repercussions of the reduced CPEC ambitions for bilateral ties should not be exaggerated. Given its strategic situation, Pakistan will continue to be politically and militarily reliant on China. It will also remain one of Beijing’s very few dependable security partners. But the more expansive vision has receded. Between 2015 and 2018, a once closed and secretive relationship had a rare period in the sun, with a “China mania” in Pakistan and an open Chinese embrace of the country that was dubbed its “one real ally.” Now it is largely resuming its traditional pattern.

The Belt and Road Initiative

China has learned some of the same lessons from its BRI flagship in Pakistan as it did elsewhere, including the need to pay greater attention to macroeconomic risk and the importance of building firmer political foundations for its investments. 

But, whereas in other countries it has been forced to renegotiate terms and navigate a higher level of critical scrutiny, China faces a different situation in Pakistan. The nature of their security relationship means that Beijing has the channels to ensure that most of CPEC’s problems can be kept behind closed doors rather than feeding the global “BRI backlash” narrative. After making initial offers of a “rebalanced” CPEC to the new government elected in 2018, it then simply encouraged the Pakistani army to silence critical ministers. Only when the coronavirus crisis hit the Pakistani economy were plans to renegotiate projects moved forward. 

The downscaling of CPEC’s ambition is likely to be replicated in other BRI countries. From Myanmar to the Maldives, China has repeatedly experienced situations in which its overbearing economic presence and poor handling of local politics undermined its economic and strategic goals. This will be considerably exacerbated by the pandemic. Beijing faces a wave of renegotiations, many of which will require a revisiting of the original contract terms rather than simply a rollover of debts. 

Yet Pakistan, for all its difficulties, was not supposed to play out this way. Given the decades of trust that had been built up between the two sides, it seemed to be a place where China could expect to be given the benefit of the doubt and avoid catalyzing the sort of resistance that it has seen elsewhere. This has not proved to be the case, with even its most reliable partners in the country having doubts about the scheme. 

Nonetheless, there is no new “BRI 2.0” model taking shape in Pakistan. This is partly a function of the country’s current economic problems, but it also reflects Beijing’s growing understanding that any comprehensive initiative of the sort that was envisaged with CPEC is going to be too difficult to execute successfully. If the experience of CPEC indicates anything about the future development of the BRI, it is therefore that a change of pace and scale is more likely than a significant recasting of the political and economic nature of China’s initiative.