PM China Visit: An opportunity to strengthen all-weather strategic partnership

As Prime Minister Imran Khan departs for what will be his first meeting with Xi Jinping in 2 years (the last in-person meeting being in October 2019) and probably the last meeting before Pakistan’s general elections in 2023. It is to be assumed that whatever he says and does in Beijing, will set the tone for the next year and a half in Pakistan-China relations. On the outset, the Prime Minister’s visit to Beijing, in and of itself, is a declaration of solidarity and support to China at a time when the United States and its partners are calling for a boycott of the Beijing Olympics, wrapped in a veneer of righteousness and alleged human rights violations by Beijing, but wreaking of containing a rapidly rising China.

As the Prime Minister goes on with what is his maiden visit in the Chinese New Year of the Tiger, it is important that Pakistan engages Beijing with strategic clarity on two fronts: economic and political, where expectations of both sides are identified, rationalized, and managed.

The Prime Minister is going with the aim of asking the Chinese government to convince its companies to relocate to Pakistan. While that sounds like a great “get out of jail free card” for Pakistan, Pakistan’s “do more” approach vis-à-vis Beijing is not sustainable and rational and unnecessarily expends the finite goodwill that Beijing has for Pakistan. As the flagship project of the Belt and Road Initiative, China has committed a whopping 62 billion USD to Pakistan, approximately half of which has been spent since the China-Pakistan Economic Corridor kicked off in 2013. Thus far, an investment of such scale and magnitude in this short time frame remains unmatched to any country by China.

Rather than asking China to relocate industry into Pakistan’s many high-potential sectors, Pakistan should consolidate and complete the existing projects and commitments in CPEC, make them successful with results, and then proceed to new projects and cooperation. For example, for the second phase of CPEC, there are 3 key Special Economic Zones in CPEC: i) Rashakai (KPK), ii) Allama Iqbal Industrial Zone (Punjab), and iii) Dhabeji (Sindh). In Gwadar, there is an industrial zone that would also serve as a prospective place for foreign investors to relocate and set up shop. All four of these zones, which are CPEC projects, have been placed as high-priority projects in phase II of CPEC.

What’s the Deal?

1. The China Road and Bridge Corporation has signed the Concession Agreement for Rashakai SEZ (the subsequent next step of the Framework Agreement is yet to take place), meanwhile, a Chinese company called Century Steel, has established a warehouse and has yet to get an electricity connection and set up the actual factory.
2. The Allama Iqbal Industrial Park, situated in Faisalabad, has received some Chinese investment, as compared to the other SEZ’s, from approximately 5 Chinese companies, however, these companies have been unable to manufacture their products due to different bureaucratic bottle-necks such as slow processing of gas connections, no electric bicycle policy of the government for electric bicycle manufacturers, difficulty in acquiring an electricity connection and so forth.
3. Dhabeji: The bidding process for the development of the SEZ was challenged in court by a company that competed in the bid process. As of now, the project is stalled because the matter is in court and hence there is no clear timeframe for the development of the SEZ.
4. Gwadar: The Free Trade Zone-I has received the interest of 40 local and foreign investors that have established their preliminary warehouses and offices in Gwadar but have yet to graduate to manufacturing and exporting their products. While the Free Trade Zone-II was inaugurated on 5^th July of 2021, it has yet to be developed. One of the key missing prerequisites for the Free Trade Zones and Gwadar as a whole is a sufficient, uninterrupted power supply.

What not to do: Learning from Hainan and Shenzhen SEZ’s of China

The much-acclaimed Shenzhen SEZ was launched in May of 1980, whereas the Hainan SEZ was launched in 1988- both within a decade of the Opening Up and Reform Policy unveiled by Deng Xiaoping, which meant China’s strategic shift to a more liberal economic system. Shenzhen’s biggest advantage was its location, being next to Hong Kong that had existing and mature business clusters, that enabled it to transform from a local fishing village to an international SEZ. Hainan, on the other hand, did not enjoy proximity to any major business hub like Hong Kong and was not able to be a resounding success despite other preferential policies that it received which Shenzhen did not.

Some of the policies Hainan extended to investors were: provision of a 70-year lease of land to foreign investors, a blanket tax exemption on all projects that related to technology investment, businesses earning profits could remit their money outside of the province without payment of income tax. Also, unlike Shenzhen, Hainan was unable to attract investment in the manufacturing sector, and most of the investment that came in the real estate sector inevitably led to a speculative bubble that eventually crashed in 1993.

Have we in Pakistan studied the successful and not-so-successful SEZs in China and the rest of the world and made a scientific plan to undertake the ones that are in CPEC? Considering, a large part of our export-oriented growth is tied with CPEC’s SEZs, do we have a time frame for each SEZ with Key Performance Indicators against specific timelines? How long will Chinese enterprises invest in Pakistan because we are “iron-brothers”? If Pakistan wants to be taken seriously by China and other investing countries, it has to present a bankable, high-return, and secure investment environment to prospective investors.

At the time of this writing, the Chinese-invested SEZ’s in Sihanouville, Cambodia, and the Mekelle and Hawassa industrial parks in Ethiopia are continuing to receive Chinese industries that wish to relocate due to rising costs of production in China. The Cambodian and Ethiopian SEZs exported $372 million and $142 million worth of products in 2018, respectively. China has many options to relocate its industry, and Chinese companies are exercising these options as the Belt and Road Initiative expands to different regions of the world. It is about time Pakistan ups its game and rises to the opportunity that is knocking hard at its door.

What needs to be communicated to Xi and his team: The 3 R’s

1. Pakistan needs to reassure Beijing that it has the capacity and capability to manage and execute existing CPEC projects while honoring its’ side of the terms of the contracts. This is critical because there have been: a) delays in-full payments to power projects, b) bureaucratic hurdles such as a two-year delay of issuance of No-Objection-Certificate by the Environmental Protection Agency for the CPEC 300 MW power project in Gwadar that prevented the company from starting its work.
2. The visit to Beijing is also an opportunity to renew the all-weather, strategic partnership with China, by reenforcing that Pakistan has strategic clarity when it comes to China in the context of the New Cold War that Beijing faces from the West. While Pakistan has made it clear it will not pick sides, it must remain clear internally and as well as in its communication to Beijing that Pakistan’s relationship with China has been and will remain strategic, that is rooted in a people-to-people bond, comprising of intertwined and shared strategic, security and economic interests, whereas Pakistan’s relationship with Washington is tactical and often transactional.
3. In his visit, the PM should inform China’s leadership that Pakistan will reverse and resolve the challenges that China has faced in Pakistan. The most glaring/important of which is the security of Chinese personnel and projects in Pakistan that have been targeted by terrorists. The second challenge is a lack of an actual, one-window solution to solve the problems of Chinese investors, as our government continues to work in silos and investors have to go from pillar to post to seek clearances and approvals. For example, the Kohala 1,124 Hydropower Project in AJK has faced a 3-year issue regarding withholding tax settlement on offshore procurement the resolution of which lies with the AJK Government, while the Federal Government has given all approvals for it to move forward.

The strong political will of the government and the consensus amongst all stakeholders on the special partnership with China should be translated into tangible, action-oriented follow-up by trouble-shooting the bottle-necks, creating systems that institutionally deal with CPEC issues regardless of their location and nature, and focus on results and outcomes more than optics and MoU’s.