Is China making Pakistan a client-state with its ‘debt-book diplomacy’?

Published: May 22, 2018
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Many of the infrastructure projects are financed through debt. PHOTO: HAPPENINGINPAK

In Pakistan, China is the most active and positive economic force. So much so that continued cooperation between the two countries is supported by virtually all sides of this otherwise deeply divided country. Everyone from the Taliban to the secularist military leaders view Chinese investment as a boon to the country, the main source of job creation, and, in all truth, the most promising source of kickbacks for themselves.

It certainly is the case that the infrastructure projects part of China’s One Belt One Road (OBOR) initiative are the most significant economic development stimulus in the economically underdeveloped country, and the most likely to also have significant upsides for the people themselves, not just a handful of corrupt officials.

But it must also be acknowledged that China is not doing this out of the goodness of their heart. One aspect of this is quite uncontroversial: the strategic rival of China in Asia is India, which historically opposes Pakistan, so it makes sense to both China and Pakistan that they should align themselves geopolitically. The investments along the Indus River both strengthen Pakistan and entrench the country firmly in the Chinese sphere of influence, much to the perceived benefit of both parties.

What is less well-advertised are the terms of the cooperation, and the costs. Many of the infrastructure projects are financed through debt. They are Chinese projects built for China’s geopolitical and economic advantage, but they will be ostensibly owned by the Pakistani state, so the Pakistani state will pay for them – with loans from China.

By June 2019, Pakistan will owe Beijing $19 billion. But the interest rate on those loans average an astronomical 7% per annum, payable over 25-40 years. According to experts’ calculations, the cost of servicing the debt owed to China will average $7 to 8 billion per year, for the next 43 years, starting from now. To begin with, that will be between 0.5 to 1% of Pakistan’s Gross Domestic Product (GDP).

There is a reason why Pakistan is becoming increasingly dependent on Chinese loans. That is because the normal financial channels for sovereign debt would not extend such loans to Islamabad. No western investor would expect Pakistan to be able to pay off these kinds of debts on these kinds of terms.

Well, nor does China. But that is not an issue. In fact, that is the point. China has been extending loans on unsustainable terms throughout South-East Asia and the Pacific region. So what happens when things come to a head? Beijing will extend payment terms, or underwrite those parts of the debt which the debtor countries cannot afford – provided the local governments understand Beijing’s point of view on this issue of infrastructure, or that issue of geopolitical alignment, and so on.

Should any of the 16 countries identified by the US State Department as already under the sway of Chinese “debtbook diplomacy”, 17 now if we include Pakistan, try to wiggle free of Chinese impositions, they will most likely be confronted by the prospect of sovereign debt default. This would make any further economic development virtually impossible, and severely undermine their political stability in a region which is already volatile enough.

Pakistan, like so many other countries in the region, has its own good reasons for wanting closer relations to China at this moment in time. But if things go along the current trajectory, “cooperation” with China will become much less voluntary in the near future.

For now, this serves the interests of Pakistan, and especially the interests of the political decision-makers in Islamabad. But when China will come in and ask for concessions, Pakistan will have no choice but to acquiesce. And when that happens, the price will, of course, not be paid by the political elite. As always, it will be paid by the average citizen.


This blog was co-authored by:

Azeem.Ibrahim

Azeem Ibrahim

An International Security and Geopolitics Lecturer at the University of Chicago. Fellow and Member of the Board of Directors at the Institute of Social Policy and Understanding and a former Research Scholar at the Kennedy School of Government at Harvard and World Fellow at Yale. He is the Strategic Policy Advisor to Imran Khan and he tweets as @AzeemIbrahim (twitter.com/AzeemIbrahim)

The views expressed by the writer and the reader comments do not necessarily reflect the views and policies of The Express Tribune.

  • Feroz

    The love of China for Pakistan and Muslims in general is a canard kept alive by propaganda, a visit to detention camps in Xinjiang will open a few eyes that want to remain closed. China is financing infrastructure projects to keep its manufacturing overcapacity buzzing, they will not aid any projects where raw materials consumed is not Chinese or labour comes from elsewhere, neither will they provide financing if competitive bidding is sought. Also most of their projects are in authoritarian countries where they can easily bribe the ruling clique to sign sweetheart deals. Good Luck to Pakistan !Recommend

  • Vinay Dua

    Most CPEC projects have a 75:25 debt equity ratio. The 7% interest is on the debt part while ROE on the equity part is much higher at 20% to 30% which is eventually borne by the Pakistani public.Recommend

  • Rahul

    Pakistan will ultimately be the winner because Pakistan has long experience taking money and just giving headache in return, just ask the Americans. The Chinese will discover soon that Pakistan is not Myanmar or Sri Lanka and they cannot squeeze blood out of a turnip.Recommend

  • Kulbhushan Yadav

    This is the mystery of the century. How CPEC FDI turned into “debt” ???Recommend

  • Dawood

    Well i m interested to know what options does Pakistan has based on the economic conditions of the country. The writer should suggest alternate suggestions also and not just the problem. Thanks for the nice article.Recommend

  • sterry

    Maybe you don’t understand that countries incur debt to build up vital infrastructure which is supposed to spur the economy; When Pakistan’s economy flourishes ( as is expected by independent Western analysts) due to CPEC, the nation will be in a position to pay off debts and progress. The article agrees that no other lender would make available to large sums needed to proceed with OBOR initiative of CPEC. Obviously China has its interests but as two close allies, Pakistan and China’s interests are aligned in terms of CPEC which is win – win for both countries. I read today that 1/4 of the EU debt owed by Italy is 1.2 trillion dollars (Italy alone !!!) – Pakistani people really have no grasp as to the small debt Pakistan is gathering under CPEC because it will all be easy to pay off and deal with when you have an economy that is finally taking off due the infrastructure investments of China. You can’t have it both ways!Recommend

  • Hosur

    China is known historically to be shrewd money operators, No country in the world which has dealt with China has prospered. The local industries have withered,unemployment has risen and low cost China products,mostly plastic has flooded. What China gives out is loan and debt not charity as many west have done.Recommend

  • zoro

    The penny falls ???Recommend

  • Raunaq Sarwar

    As the saying goes, “Nothing comes for free”Recommend

  • Milford

    Yeah, you are way smarter than the guy who teaches in UChicago in the very field he’s talking about. Pakistanis can be so stupid. Recommend

  • Sanjeev

    Infrastructure is useful if you have something to export. Why Pakistani economy will flourish if the infrastructure carried Chinese goods only? Do you think China will allow competition in the international market from Pakistani goods exported through CPEC? Pakistan will be at best only a raw material supplier at the prices dictated by China. Ask only two questions to yourselves – What new goods will be exported through Gwadar which cannot be exported today through Karachi – which has unutilized capacity? Whether China will allow competition from Pakistani goods. If not, how the infrastructure will benefit Pakistan.Recommend

  • Sane sid

    Well Hard work…. and controlled expenses only where it is required for a few years my help…. Self Discipline and Introspection is what the writer is suggesting. Practice these and your State may see improvement in a few years…. Good Luck from IndiaRecommend

  • ramanan

    Sit, you are too stark. If pak economy fails, it will be a big problem for India, nobodyelse. I only hope they remain a functioning democracy so that all these mindless excesses play out and they evolve into a society at peace with themselvesRecommend

  • http://peddarowdy.wordpress.com/ Anoop

    What happens when poor countries won’t be able to pay back the loans?

    Answer: China asks for key infrastructure like Gwadar port for an absurd 99 year lease!

    https://www.colombotelegraph.com/index.php/hambantota-fiasco-implications-for-future/

    https://thediplomat.com/2017/12/sri-lanka-formally-hands-over-hambantota-port-to-chinese-firms-on-99-year-lease/

    We will go away, our children might too, Chinese will still control key infrastructures in that country.

    I’m pretty sure Chinese have a long list of demands. That is why their loans to Pakistan is also pretty high. More the loan, more the free infrastructure China can take over.

    What does $53 Billion get you? Ports, Highways, Agricultural land, SEZ, visa regimes for Chinese citizens etc.

    All perfectly documented in the Chinese blueprint leaked by Dawn.Recommend

  • in Love of Making Things

    yup the dark side is not advertised. no body is telling how it will venefit commonmanRecommend

  • Sridhar Kaushik

    Look at what happened to Srilanka and Venezuela.
    China is flush with foreign exchange and seems to do this deliberately. When recipient nations are unable to pay back loans, China trades land for loans, thereby slowly colonizing that area.
    When Pakistanis realize what has happened, it may be too late.Recommend

  • Patwari

    Well, did you ask yourself why Pakland’s infrastructure was allowed
    to deteriorate and crumbled into such neglectful state? [over the last
    70 years] That it needs massive infusion of $billions to bring it to par.
    And why more than 15 million school age children have not seen the
    inside of a school in Punjab alone! The most prosperous and loaded
    province in Land of the Pure. Courtesy of the Sharif Bros. and Cabal.
    You will be hard pressed to take advantage of CPEC when the literacy
    rate is only 58%. Dropped down from 60%.
    We are still waiting for an answer from Maryam Safdar ne Nawaz as
    to what happened to the $40 million dollars that were given to her
    by Michelle Obama’s NGO for Girls Empowerment. Girls education
    in Pakland. Thanks to Malala’s front and center crusade for education.
    The same Maryam who was put in charge of the ‘Youth Enterpreuner
    Scheme’ worth Rs. 80 billion, by her Papa, the Prime Minister! She
    had no prior banking or leadership experience! Until the Lahore High
    Court stepped in and removed her!
    There is a name for it. It’s called world class Mega Corruption.
    As practiced by Pakland’s politicians led by their standard bearer :-
    ‘Man with the bloated face from Jati Umra’. He also had a Dubai
    iqama,… though he was the PM of Pakland!
    Very revealing, is it not?Recommend

  • Vinay Dua

    With projects worth almost half of the total CPEC outlay of $65 billion already completed or about to be completed, what visible change has come to any of the Pakistan’s economic sectors be it exports, manufacturing or agriculture?

    After the construction of the Free Trade Zone building and exhibition building, no new construction has been initiated by the Chinese at Gwadar be it the new berths in the port, Export Processing Zones for electronics and automobiles, Oil terminals, gas pipelines, coal fired power plant, Eastern expressway etc. These all are still just plans with no start date mentioned anywhere including in the Long Term Plan. What are the Chinese waiting for?

    Gwadar still has just 3-4 ships visiting it every month as was the case before while there are no reports of any convoys of container trucks coming from Kashgar to Gwadar. At this rate it will take many more years for CPEC to start generating meaningful revenue while the installment for the CPEC loan repayment starts from next year.Recommend

  • Gratgy

    ” the strategic rival of China in Asia is India”

    Nope, the strategic rival of China in Asia is Japan. If India was indeed their rival then China would be giving grants and aid not loans at high interest rates and not be begging for India to join the CPEC. They just want some simple minded people to think this so that they buy into their debt trapRecommend

  • Sane sid

    Well its a mystery for a selected few…… Rest of the World knows it alreadyRecommend

  • disqus_MKeynes

    It will be to the benefit of India. China will snuff out Islamic fundamentalism and all Jamati parties. India will have to find creative ways to manage a militarily agressive China on a new side of India. It will have to form new alliances with US and Russia and rely on massive weapons to deter China from attacking India.Recommend

  • Gratgy

    Most of the loans China gives has the option to swap equity for debt. If Pakistan is unable to pay then China has the option to convert this into equity and take over the project in its entirety. Just like Pakistan gave 91% of Gwadar to China, soon every other project will go the same way. Hence China will be owning the CPEC and all the power projects associated with it unless Pakistan has the wherewithal to pay its loans

    China is the new Baniya on the blockRecommend

  • Rajendra Kumar

    You may be partly right, but remember Chinese are not Americans either. Chinese will recover their money by hook and crook. China will simply occupy some important lands of Pakistan in return. Pakistan will constantly require money and other than China no one will land. So China will always have upper hand and then they will play India card any time to bring Pakistan in its place.Recommend

  • Faisal Aslam

    all indians with burning Envy wandering here n there and end up at pakistani newspapers sites… this hindo nation has long history of back stabbing and extreme Envy from Pakistan… When china and pakistan come close to each other, indian burn like hell, indians r breaking record in rape in india, keep burning who cares…. khalistan is now a reality, Sikhs of Punjab now very much aware how indian army invaded Golden Temple…by the way indians should discus their increasingly growing Slums (Jhonpar Patti) accross india… why they always look in to Pakistan… they r suffering from Pakistan phobia….!!!Recommend

  • Faisal Aslam

    in an international debate, shame on pti followers… these dirty ppl never know the word… National interest… shame on PTi and its followers, always damaging national interests….Recommend

  • Ahmar

    ”According to experts’ calculations”

    Which experts calculations?

    Cost of servicing the debt will be average ”$7 to 8 billion per year for 43 years” according to the authors.

    Simple calculation shows that $7 billion per annum for 43 years would be $300 billion. They calculated this payment on a loan of $19 billion???
    Recommend

  • Gopi Karunakaran

    If Pakistan has to avoid the debt trap that it is getting into with China, it has to discontinue its revisionist policy towards India. It should reconcile to the dominant position of India. Reconciling will not mean a reduced status for Pakistan. If France and United Kingdom can come to terms with their long standing enmity (and they fought two world wars together), why can’t Pakistan and India. The economies of the two countries are complementary. Both can gain enormously trading with each other. If Pakistan becomes one of India’s major trading partner, it would be in India’s interest to maintain the political and territorial integrity of Pakistan. This at least is an insurance for Pakistan. But I wonder if the vested interests in Pakistan understand this or would want it.Recommend

  • chakrs

    You seem to suggest that this article was written by an Indian.Recommend

  • V Kumar

    if there is a default on chinese yuan debt, is it taken as a sovereign default in the same way as defaulting on IMF or dollar debt? Or is the rating scheme different.
    Anyway when you have nothing to lose, you can default. What is the worst that can happen? That china will refuse to extend credit or maybe seize some meagre assets of pak in china. So what?Recommend

  • Maha Bharat

    U MEAN…IF PAK COLLAPSE IT WILL BE BAD FOR INDIA?????
    AND PAK ALWAYS WISH BAD FOR INDIA….COMING TRUE :):):)Recommend