Why China Could Tighten its Purse Strings on CPEC Projects

Pakistani Prime Minister Shehbaz Sharif will visit China on November 1-2, when he will meet with Chinese President Xi Jinping. This is a significant meeting; It is Sharif’s first visit to China since he became prime minister, and in a sign of the importance of the China-Pakistan partnership, Sharif will become the first foreign head of government to meet with the Chinese president after he the latter won an unprecedented third term as president. General Secretary of the ruling Chinese Communist Party last week.

Sharif’s visit to China is very important for Pakistan; the Pakistani prime minister will be accompanied by a high-level delegation that includes Foreign Minister Bilawal Bhutto Zardari.

The Pakistani government hopes that several China-Pakistan Economic Corridor (CPEC) projects that have been pending for years will get a boost after the Sharif-Xi meeting. Chief among these projects is the $10 billion Karachi to Peshawar rail project.

Last week, the Sino-Pakistani Joint Coordination Committee (JCC) agreed to start the Main Line (ML)-1 project for the construction of the railway line from Karachi to Peshawar. The two sides also agreed to explore new avenues in the mining sector and expand cooperation in the information technology sector. MoUs and agreements related to CPEC projects are expected to be signed during Sharif’s visit to Beijing.

Importantly, the Pakistani delegation is expected to request the Chinese government to renew deposits and reschedule debts worth some $27 billion. It remains to be seen whether Xi will agree to Sharif’s requests.

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More than any other country, China has been pouring money into low- and middle-income countries. However, according to World Bank Statistics, the volume of these loans has fallen by about 40 percent in recent years. Despite these cuts, Pakistan remains one of the main recipients of Chinese loans. This is mainly due to CPEC, a flagship project of China’s Belt and Road Initiative (BRI).

CPEC is an important component of China’s efforts to boost its energy and economic security. One of the world’s largest energy consumers, it relies heavily on imported oil to meet its needs. More than 80 percent of this oil reaches China through maritime routes. One of the most important sea routes for these imports is the Strait of Malacca. However, Beijing fears that rival powers will block its access to this strategic waterway in the event of war, which would have a devastating impact on the Chinese economy. This “Malacca dilemma” led China to seek alternative sea routes for its imports to China. And this is where his interest in CPEC arose.

In addition to reducing China’s reliance on the Strait of Malacca and the South China Sea, CPEC enables Chinese imports from the Persian Gulf and Africa to reach China’s western provinces via a shorter distance through Pakistan’s Gwadar port. than the longest journey by sea and land through East China. coast.

However, it has not been easy for China to realize these plans. Chinese funding for CPEC projects has slowed in recent years.

Although the security situation, especially in the port of Gwadar and Balochistan, has always been a concern, this did not stop the Chinese from investing in CPEC. So why is China hesitant to invest more in Pakistan now? There are two possible reasons: one is the already huge debt that Pakistan has been unable to pay; the other is the economic situation in China.

While Pakistan is considering continued and intensified bilateral cooperation with China and the implementation of CPEC projects, there is concern that Islamabad may be trapped by debt. These concerns are not without foundation. according to a report by the International Monetary Fund (IMF), Pakistan’s debt to China is three more times of what it owes to the IMF. This is also more than it owes to the World Bank or the Asian Development Bank.

Huge international debts and current inflation rates ranging from 23 to 30 percent have left it in the grip of an economic crisis. Added to this is the enormous destruction caused by the recent floods, which, according to the World Bank, could push up to 10 million people in poverty in Pakistan. The country is barely in a position to pay its growing debt to China and this worries Beijing. Extending more loans to Pakistan in the midst of this situation is fraught with risks for China.

Meanwhile, the Chinese economy is struggling with a structural slowdown. The expected growth is showing a significant decrease; part of this, according to analysts, is due to the growth model driven by debt and investment inside and outside the country. According to the IMF, in July this year, China’s GDP for 2022 showed the slower growth rate in four decades, excluding the COVID-19 crisis period in 2020.

In these circumstances, China, despite being the second largest economy in the world, will have to carefully calibrate its economic policies to avoid huge financial risks. Pakistan may be China’s key economic and political partner, but a cautious approach to foreign lending could see it adjust its budget to CPEC projects.

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