BUYER’S REMORSE: PAKISTAN’S ELECTIONS AND THE PRECARIOUS FUTURE OF THE CHINA-PAKISTAN ECONOMIC CORRIDOR
JULY 27, 2018
Editor’s Note: This is the 22nd installment of “Southern (Dis)Comfort,” a series from War on the Rocks and the Stimson Center. The series seeks to unpack the dynamics of intensifying competition — military, economic, diplomatic — in Southern Asia, principally between China, India, Pakistan, and the United States. Catch up on the rest of the series.
Why should China care about the outcome of this week’s elections in Pakistan? Historically, China has could afford to be indifferent to the civilian political leadership of its “all weather” friend. The abiding relationship was with the Pakistan Army, and Pakistan’s major political parties all understood the value of maintaining good terms with Beijing. Chinese officials certainly have had their preferences about Pakistani politicians, parties, and political platforms. But this had little impact on the fundamentals of the Sino-Pakistani relationship, which remained overwhelmingly security-centric.
In this week’s elections, however, Pakistani domestic politics loomed a great deal larger for China. Due to the increasing importance of the China-Pakistan Economic Corridor (CPEC) to the two countries’ cooperation, China’s interest in the management of Pakistan’s finances, energy, ports, and railways has assumed newfound significance. The reasons are more than just economic. CPEC was the new great hope of Sino-Pakistani relations, seen in China as a way to strengthen Pakistan’s stability, bolster its strategic position, and upgrade bilateral ties beyond their military confines. Yet in the run-up to the elections, CPEC has been languishing. The second phase of the scheme has stalled, civil-military skirmishing has consumedthe country’s political energies, and Pakistan’s balance of payments situation has entered another crisis. Meanwhile, Beijing is facing growing pressure to improve its fraught relationship with New Delhi, where the deepening China-Pakistan axis has become one of the biggest points of contention.
In the aftermath of the elections, Beijing will therefore be watching closely to see whether a government led by Imran Khan and his Pakistan Tehreek-e-Insaf (PTI) party has the capacity, the will, and the political space to deal with the growing list of economic challenges that affect China’s most prominent connectivity project. If not, Pakistan faces a real risk that China will discreetly unwind its bet, backing away from the strengthened political commitment to the relationship that Pakistan has been enjoying since 2015, instead once again imposing more constraints on the scope of its support.
The Rise and Fall of the Economic Relationship
In the last three years, the economic dimensions of the China-Pakistan relationship have assumed growing salience, especially given CPEC’s exalted status as the “flagship” of Xi Jinping’s Belt and Road initiative. While Pakistan’s army remains the fulcrum for Sino-Pakistani ties, it can help to guarantee and secure CPEC but it cannot implement it. For that, China has needed a civilian government that is broadly economically competent, corrupt only to a modest degree, and able to focus a healthy amount of political energy on executing the plans. The Chinese also believed that CPEC would strongly benefit from continuity within the Pakistani government.
It was no secret, then, that Chinese officials quietly favored a second term for then-Prime Minister Nawaz Sharif’s party, the Pakistan Muslim League-Nawaz (PML-N). This preference ran up and down the system. China praised the province of Punjab, led by the prime minister’s brother, Shehbaz Sharif, as by far the most effective at executing CPEC projects on schedule.
This is not to say that China had a problem with other parties. The Pakistani People’s Party (PPP) had been supportive from the start, with former president Asif Ali Zardari gaining credit for getting CPEC in motion during his term in office, particularly his role in persuading the reluctant Chinese to take on the difficult task of making Gwadar port functional. Political tensionswith Khan and the PTI in the early stages of the project, when Beijing was troubled by repeated criticisms over transparency and routes, have mostly been resolved. The PTI-run Khyber-Pakhtunkwa provincial government, whom the Chinese had privately criticized, ultimately got on the CPEC train. Still, there was little question that the PML-N got the discreet nod from Beijing.
This all changed, however, when the Pakistan Army escalated its campaign against Nawaz Sharif late last year. Following his disqualification from office over corruption claims in July 2017, the army has taken significant steps to undermine the PML-N in the elections and prevent the return to power of a political leader they deeply mistrusted. As a result, China found itself dealing with a familiar situation, albeit with very different implications for its interests: a weakened civilian government in Pakistan, with governance essentially subordinated to political warfare and no certain end in sight even after the elections. There were rumblings of concern from Beijing about this as early as last year. Whereas in the past China had consistently flagged security threatsas the number one challenge facing CPEC, now Chinese officials and experts privately indicated that domestic political issues had become the principal source of anxiety.
Meanwhile, plans for the next stages of CPEC essentially went into stasis. Existing projects are being implemented on the ground, but there has been no serious progress on the intended focal point of CPEC’s second phase: industrial cooperation and the Chinese-style special economic zones, which was supposed to be the part of the initiative that generated jobs, exports and growth. While the slowdown is not solely the result of the political situation, my private discussions suggest it is heavily conditioned by domestic politics. The second phase of the project was already more politically complicated given the sensitivities around special economic zone site locations, the concerns of Pakistani businesses, and the emerging need to embed the initiative into a broader economic reform and industrial policy agenda. Even the existing energy projects have already been facing problems, with the notably generous rates of return that Pakistan promised Chinese energy companies proving hard to fulfill.
On top of all this is Pakistan’s rolling balance of payments crisis and the looming threat of a return to International Monetary Fund (IMF) financial support. For China this a lose-lose scenario. If Pakistan does receive yet another IMF bailout, officials have indicated that one of the conditions would almost certainly be an opening of the bookson the opaque CPEC contracts to give creditors an accurate overview of the financial picture. As another condition, the most economically questionable CPEC projects would likely be put on ice. The narrative that emerges will likely be that the Belt and Road has forced yet another country into financial difficulties – China’s closest friend, no less. In reality, CPEC has been only a partial contributor to the balance of payments problems, but in light of the high-profile Belt and Road scandals in Sri Lanka, Malaysia, and elsewhere, the Chinese are unlikely to be given the benefit of the doubt.
The alternative to an IMF bailout is even more problematic: for China to continue to provide short-term financing to Pakistan itself, as its banks have been doing in recent months. Beijing would likely either have to take on the uncomfortable responsibility of imposing its own economic conditions for the financing or assume the ongoing burden for Pakistan’s dollar requirements, with no firm guarantees that the situation will be resolved.
The Golden Thread: Chinese Hopes for CPEC, 2015-2018
Given these constraints, CPEC may well end up proceeding on a somewhat less ambitious scale after the elections, which would have been true even if the PML-N had remained in power. Viewed through a purely economic prism, this would be disappointing, but not disastrous. There is already around $20 billion of projects completed or in motion, more than might have been expected given the dismal history of Sino-Pakistani economic cooperation. A period of stock-taking, including a more rigorous IMF program, the parking of certain CPEC projects, and far greater overall transparency, would have its benefits.
But the political and strategic implications of a CPEC slowdown would be more complicated. To understand why, it’s helpful to look back at how Chinese leadership came to see CPEC as beneficial in the economic, geopolitical, and security realms. Pakistan has benefited from a wave of Chinese goodwill since 2015, when preparations for President Xi’s visit to the country were getting underway. Chinese analysts started talking about Pakistan as China’s “one real ally” and about the relationship as a “model to follow.” Xi was originally supposed to make the usual paired trip with India the previous year, but when the Pakistan leg of his visit was derailed by protests in Islamabad, China decided to treat the delay as an opportunity. Visiting Pakistan separately would be a chance to portray the bilateral relationship in a different light, focused on economic cooperation, connectivity, and issues, such as Afghanistan, where China was playing a constructive role. This was not purely a matter of optics: Increasingly, the Chinese view was that it could and should deepen ties with Pakistan while treading less carefully around India’s reactions: a form of de-hyphenation, that is, dealing with India and Pakistan separately rather than as a dyad.
CPEC was the golden thread that tied it all together. For those in China who favored a stronger Pakistan tilt, the corridor provided a neat riposte to the skeptics (and for all the flowery public language, there are plenty of Pakistan-skeptics in China). In private discussions, Chinese officials and analysts who favored deeper ties with Pakistan argued that closer relations would be essentially economic in nature, but would deal with many of China’s security concerns too: helping to stabilize and de-radicalize the country and shifting Pakistan towards a more restrained foreign policy, a necessary precondition for the success of the economic project. Some of these arguments, they contended, could be sold to India too: New Delhi could be persuaded of the advantages of CPEC “weaning the populace from fundamentalism,” as Chinese premier Li Keqiang supposedly told Narendra Modi. For economic policymakers in China, who have been among the most skeptical about Pakistan, supporters could point to the excellent financial terms that Islamabad was willing to accept.
The Pakistan Army was doing its bit to make things easy too. While the CPEC plans were under discussion, Uighur militants in North Waziristan, whose presence had been a standing irritant for China, were forced into Afghanistan by the Zarb-e-Azb campaign.
All the existing reasons to strengthen the relationship remained relevant: bolstering Pakistan as a counterbalance to a rising India, Pakistan’s unusual willingness to support the People’s Liberation Army’s global power projection capabilities, and so on. But CPEC tied it all neatly together and had the added benefit of being sufficiently flashy to overshadow these traditional security matters, thereby making it easier for China to openly embrace the relationship than when its substance had largely consisted of weapons sales.
As a result, from 2015 to 2017, Pakistan experienced a palpable political upgrade. Delegations were traveling back and forth frequently, ministries that once spoke to each other rarely were in conference calls every couple of weeks, doors were open, processes were expedited, and the whole energy of the relationship had changed. There was also a tangible sense that China had Pakistan’s back to a greater extent than before: diplomatically, financially, and in security mattersat precisely the moment when Pakistan’s back was against the wall with the new Trump administration.
An Evolving Strategic Landscape
Today, things look very different. CPEC’s difficulties are primarily internal to Pakistan but the broader strategic landscape has also shifted. In particular, China is under significant political pressure to stabilize its ties with New Delhi. The deterioration of the Sino-Indian relationship in recent years has been costly on several fronts. It exposed China to a set of risks on a border that it had previously seen as well-managed and predictable, the political ramifications of which were amply displayed by the appalling timing of the Doklam crisis in the run-up to the Nineteenth Party Congress. It resulted in a series of headaches for the Belt and Road Initiative in South Asia, from the symbolic – India’s boycotting the 2017 BRI Forum – to the very practical – India’s role in ensuring Mahinda Rajapaksa’s 2015 election defeat in Sri Lanka, the Chinese loss of the Sonadia port project in Bangladesh, and the politicization of the Belt and Road in virtually every political campaign and project tender in the region. Moreover, with U.S.-China relations heading into a more sharply competitive phase, Beijing has been making efforts to shore up ties with other major powers, with India a natural focal point. And the forceful stances that New Delhi has taken on a host of bilateral and regional issues with Beijing now give it negotiating space, as China tries to put the relationship on a firmer footing again.
In this regard, the Sino-Pakistani relationship may itself be on the table. China’s ties with Pakistan have been one of the principal recent sources of tension between China and India, from Masood Azhar, to the Nuclear Suppliers Group, to CPEC itself. India never bought the story that CPEC would help stabilize Pakistan economically or restrain it militarily, instead seeing the project in relation to sovereignty concerns and through the security prism that has long been the most accurate one for assessing the China-Pakistan relationship. For China to sell its case, it would have needed a convincingly positive economic story out of Pakistan, which seems unlikely to materialize. China had also hoped that by now its officials would not need to spend quite as much political capital on Pakistan’s behalf over issues of terrorism and militancy. Instead Beijing remains stuck fending off the same designations in the UN’s 1267 committee and elsewhere.
In short, the CPEC slowdown and the latest round of civil-military skirmishing in Pakistan are not taking place in a vacuum. This is precisely the juncture where Pakistan should be making it extremely painful for China to contemplate abandoning its efforts at de-hyphenation. Instead, developments inside Pakistan have made it easier for Beijing to undergo a modest rebalancing for the sake of more stable ties with India.
Pakistan has already faced the repercussions of this shift. The first evidence came at the Financial Action Taskforce meeting in February, where China supported grey-listing Pakistan for failing to do enough to curb anti-terror financing. Pakistani officials tried to spin China’s decision as best they could, but in fact Beijing had been negotiating with New Delhi to drop its support of Pakistan in return for India’s backing for an uncontested run at the vice-presidency of the body. The symbolism of the deal was important: After a period of high tension, India and China could now transact on matters of mutual interest, with Pakistan as one of the items on the table.
China also sees room for maneuver with India in other areas that affect Pakistan. This includes the Belt and Road, which has been the subject of serious critical reflection in Beijing anyway. China has made more concerted efforts to get previously skeptical partners on board. While New Delhi has so far been less interested in negotiating on the details than, say, Tokyo and Brussels, clearly CPEC itself – and Indian sensitivities around it – are not off the table for discussion.
The phase after the Pakistani elections will therefore be important in shaping not only the contours of the China-Pakistan relationship, but also strategic competition in South Asia in the coming years. If the new PTI-led government demonstrates its willingness and capacity to focus on a serious economic agenda, there is still an opening to address the problems with CPEC, which China certainly does not believe to be insurmountable. Imran Khan’s victory speech set the right tone, but China will be keen to test its mettle, given some of the reservations that Beijing retains about its experiences with the PTI in recent years. Privately, the Chinese side has also made it clear that there is scope to renegotiate the terms of the CPEC projects themselves if it makes political and economic sense to do so. But if Beijing sees an extended period of political infighting ahead and has to navigate another round of bad press surrounding the Belt and Road Initiative, general reassurances of friendship and commitment to CPEC will not overcome the perceptions that Pakistan is unable to channel the requisite energy into making a success of their flagship connectivity endeavor.
The consequences of a CPEC slowdown would go beyond the economic. The fundamentals of the security relationship are not going to change, and we are not going to see China regularly throwing Pakistan under the bus for India’s sake. But CPEC was supposed to be the vehicle by which the broader relationship would be placed on a higher footing and better insulated from shifts in Chinese dealings with India. With that came greater expectations, demands, and pressures from China. And there was always a risk that if those expectations were not fulfilled, we would see a reversion to the pre-2013 version of the relationship with a thin economic veneer on top, also tinged with greater Chinese wariness about placing too many chips on Pakistan again.
In the short term, such a recalibration might even help to stabilize security dynamics in the region. Deepening Sino-Pakistani ties were one of the factors accelerating South Asia’s geopolitical competition. But a drift in relations would also mean the weakening of a rare effort – however flawed –to promote an economically-driven agenda for Pakistan rather than being resigned to the usual political and military proclivities determining the future of the country and the region.