China-Pakistan Economic Corridor (CPEC)

In News

• Recently, according to a report from the Green Finance and Development Centre, China’s investments in infrastructure projects under its Belt and Road Initiative (BRI) have declined while its short and medium-term assistance to partner countries have increased.

Major outcomes of the report

• Declining Investments
  • In the first half of 2022, China’s engagement through financial investments and contracts in 147 countries amounted to $28.4 billion, up by 47% from the previous year.
  • This marked a decline from $48.5 billion in the same period in 2019.
• The report noted three clear trends in the BRI:
  • A growing role for Chinese State-owned Enterprises
  • The average size for project deals falling from $558 million in 2021 to $325 million last year
  • An increasingly uneven spread of engagement.
• Assistance to partner countries
  • Several countries saw no Chinese engagement in the first half of the year, including Russia, Sri Lanka and Egypt, while the figure in Pakistan was down by 56%.
  • In the past five years, China made nearly $26 billion in short and medium-term loans to Pakistan and Sri Lanka alone marking a shift in its overseas engagement from funding infrastructure toward providing emergency relief.

About China-Pakistan Economic Corridor (CPEC)

• Launched in 2015, the CPEC is the flagship project of the multi-billion-dollar Belt and Road Initiative (BRI), a pet project of Chinese President Xi Jinping, aimed at enhancing Beijing’s influence around the world through China-funded infrastructure projects.
• The 3,000 km-long China–Pakistan Economic Corridor (CPEC) consists of highways, railways, and pipelines.
• CPEC eventually aims at linking the city of Gwadar in South Western Pakistan to China’s North Western region Xinjiang through a vast network of highways and railways.
• The proposed project will be financed by heavily-subsidised loans that will be disbursed to the Government of Pakistan by Chinese banks.

Significance of the Plan

• The agreement is aimed at boosting Chinese investment in Pakistan as well as transferring Chinese industrial capacity.
• The framework will promote industrialisation and development of economic zones, and initiate, plan, execute, and monitor projects, both in the public as well as the private sectors.
• The corridor links Xinjiang with Gwadar and also passes through Pakistan-occupied Kashmir (PoK) where China is investing in a number of projects.
• CPEC’s early-harvest projects had transformed Pakistan’s economic landscape, thus laying a solid foundation for sustainable economic growth.

Challenges associated with the plan 

• Delays in execution: The CPEC projects were also facing delays because of the change in taxation policies by the last government in violation of commitments given to China.
• Pakistan’s failure: The Chinese authorities were irritated because of Pakistan’s failure to honour its contractual obligations under the CPEC framework.
• Financial crisis: China is also concerned over the acute financial crisis faced by Pakistan, prompting it to step in periodically to bail it out with induction of foreign exchange loans.
•  Pakistan was a critic of the China Pakistan Economic Corridor (CPEC) earlier for its secrecy and uneven investments neglecting certain provinces of the country.
• India has protested to China over the CPEC as it is being laid through the Pakistan-occupied Kashmir (PoK).
• A report by US-based international development research lab AidData said that a substantial chunk of Chinese development financing under the CPEC consists of loans that are at or near commercial rates as opposed to grants.
• Lack of transparency: As much as 40 percent of China’s lending to Pakistan does not appear on the government’s books.
• Laxity: The project is behind schedule and only three of the total 15 projects announced have been completed so far.
• China’s debt trap policy: Critics also foresee that the weak economic indicators of Pakistan might lead to a possibility of the country defaulting on debt repayments, as Chinese loans have high interest rates.

India’s Concerns

• Violation of Indian Sovereignty: 
  • The project violates the sovereignty of India as it passes through Pakistan-occupied Kashmir (PoK), which is a disputed territory between India and Pakistan. 
  • As per well-established international conventions, no construction is allowed in any disputed territory, without taking the other country into confidence.
• Exploitation of Natural Resources: 
  • Under CPEC, China plans to build two mega-dams on Indus, named Bunji Dam and Bhasha Dam. 
  • This will put a heavy strain on the Indus Water Basin.
• Security Concerns for India: 
  • Increase in China’s Activities in IOR: 
    • With Gwadar being a part of CPEC, India fears an escalation of PLA Navy activities in the Indian Ocean Region (IOR). 
  • Threat to Indian Trade and Connectivity: 
    • Majority of Indian tangible imports pass through the Strait of Hormuz. 
    • China can easily create impediments to its access to the Middle-east in case of a conflict, jeopardizing India’s energy security.
  • Enhanced threat from Pakistan: 
    • With the overhauling of the Karakoram Highway, Pakistan will enjoy an advantage in mobilizing troops as well as heavy military equipment to PoK. 
    • At the same time, an increase in financial returns to Pakistan through CPEC may expand its ability to fund military infrastructure as well as state-sponsored terrorism in Kashmir, thus destabilizing the region.

Way ahead

• Maintain Communication: 
  • Experts have advocated that India maintain communication and cordial relations with its neighbours. 
  • In such a context, India has done well to keep participating in forums like Shanghai Cooperation Organization to maintain communication with both Pakistan and China.
• International Collaboration: 
  • It is well settled that India cannot compete with China in the matter of financing developmental projects like CPEC in other developing countries. 
  • Therefore, it needs to collaborate with agencies like Japan International Cooperation Agency (JICA) to offer soft loans to save them from falling into the Chinese debt trap.
• Security Concerns: 
  • Developing countries, especially the countries of Southeast Asia have pinned their hopes on India to counter China’s hegemony in the region. 
  • Here, India needs to build on alliances like Quad to maintain the balance of power in the Indo-pacific region.

Source: TH