When Chinese President Xi Jinping went to Pakistan on an official visit in April

2015, he brought with him a $46 billion gift that potentially could have very
significant benefits for that country, as well as have a major impact on the region.
And although there remain a number of unknowns on how this massive Chinese
investment package will be implemented over the next 15 years or so, it is certain
that it will pull Pakistan even deeper into Beijings geostrategic orbit. Even though
China and Pakistan have had a long and fruitful relationship for well over 50 years, if
all the projects associated with this deal are ultimately implemented, it will be a
game-changer for the regionequal to all the foreign direct investment inflows into
Pakistan since 1970 combined and dwarfing the $7.5 billion US aid package passed
by Congress in 2009.

This $46 billion deal, known as the China-Pakistan Economic Corridor (CPEC), is
essentially a package of major projects that fall into two domains: transportation and
energy. On the transport side, there are about $12 billion in plans to build, among
other things, a rail link connecting Gwadar, a Chinese-built deep-sea commercial
port on Pakistans southern coast, to the western Chinese city of Kashgar, some
2,000 miles to the north. Other projects include widening the treacherous
Karakoram highway, itself previously built with Chinese help; upgrading Gwadar
airport; building a 125-mile tunnel linking the two countries; and upgrading a
number of existing highways, including the critical Karachi-Lahore section.

A number of energy projects, about $34 billion in total, are also on the drawing
board, including pipelines to transport oil and gas to Kashgar; the completion of the
Iran-Pakistan gas pipeline; and a number of coal, wind, solar, and hydro energy
plants that would add some 10,000 megawatts to energy-starved Pakistan by 2018.

But the jewel in the crown for China is the development of Gwadar, which would give
Beijing a firm and reliable long-term beachhead in the Indian Ocean and close to the
Persian Gulf, effectively making it a two-ocean power.

The CPEC deal grants the Chinese 40-year operation rights to the port. This is
hugely significant for Beijing because it will allow China to ship some of its oil
coming from the Persian Gulf to that port and pump it through the pipelines to
western China. Accordingly, with a transport route some 6,000 miles shorter, China
will be able to save billions in transport costs and saved time. Indeed, Pakistan in
general and Gwadar in particular will be playing a critical role in Chinas joint plans
for a Silk Road Economic Belt and a Maritime Silk Road linking China to Europe and
beyond.

At the moment, Gwadar is being developed as a commercial port and not as a facility
for the Chinese Navyyet it could potentially be made into one in the future. Such a
development would without any doubt exponentially increase Sino-Indian maritime
1
competition in the Indian Ocean, in keeping with Chinas first official defense white
paper, published in early 2015, which makes quite clear that the traditional
mentality that land outweighs sea must be abandoned, and great importance has to
be attached to managing the seas and oceans and protecting maritime rights and
interests.

In a move that will strengthen the defense of Gwadar, Pakistan is negotiating with
China the purchase of eight diesel-powered, conventionally armed attack
submarines. This acquisition, which is reportedly part of the CPEC package, would
be one of Pakistans biggest weapons purchases ever, at about $6 billion. Pakistans
possession of such submarines, which are very quiet and lethal, would seriously
complicate any Indian attempt in blockading Karachi or Gwadar. This sale would
also further entrench China as Pakistans principal arms provider. In 2010 alone,
Pakistan was the destination for 60 percent of Chinas total arms sales.

While obviously not publicly stated, the third reason for the CPEC project is to
counter the US-Indian rapprochement, which has accelerated since Narendra Modi
was elected as prime minister of India last year. It was a process that had already
begun under President Bush, who had stated back in 2005 that the US wanted to
help India become a great power. But now it has become more insistent. During his
visit to India in January 2015, President Obama finalized the July 2005 US-India
nuclear deal and renewed the 10-year military cooperation agreement of 2005.
Defense Secretary Ashton Carter also signed a defense framework agreement during
his visit to New Delhi in June 2015. Much of this rapprochement between the United
States and India is driven by Chinas aggressive behavior in the South and East
China Seas. And this latest Chinese venture in Pakistan will no doubt fuel concerns
about Chinas military intentions in the Indian Ocean.

Baluchistan has been in the throes of a low-level insurgency since the early part of
this century. Chinese workers and other non-Baluch have increasingly been the
targets of Baluch insurgents opposed to large development projects. For example,
three Chinese engineers were killed by a car bomb at Gwadar in May 2004. Also, the
insurgents regularly sabotage oil and gas pipelines. In addition to the several Baluch
insurgent groups that seek greater autonomy from Islamabad, there is also a very
active terrorist group, Lashkar-e-Jhangvi, which targets principally, but not solely,
Pakistani Shiites, especially the Hazaras. The group sometimes works with ethnic
Baluch groups in coordinating attacks.

China shelved several Gwadar-related projects a few years back because of security
concerns. Presumably Beijing has decided to go ahead now because it believes the
Pakistan security forces will be able to contain these insurgents. Confirming
Islamabads determination to prevent future attacks, the Pakistani government has
promised to provide 10,000 troops, including 5,000 trained specifically in
counterterrorism, to protect Chinese workers. And although there will be a lot of

2
pressure on Islamabad to ensure that new pipelines are safe from sabotagenow
that they will be transporting oil and gas to Chinathis will not be an easy task.

In the wake of a terrorist attack on Karachis international airport in June 2014,

Islamabad ended its unsuccessful negotiations with the Pakistani Taliban, and
ordered its armed forces to launch a military operation in North Waziristan and later
in the Khyber Agency in FATA. Reportedly, Beijinglike Washingtonhad been
pushing for this course of action. While the Pakistani military has successfully
hunted down many of the terrorists, including the members of the ETIM, many of
them have found refuge across the border in Afghanistan. Nevertheless, the year-
long operation, which has brought the total number of Pakistani troops in FATA to
some 200,000, has managed to degrade, disperse, and disrupt the terrorists
capabilities and networks.

Importantly, following the horrendous terrorist attack on a school in Peshawar that

killed 148 people, principally children, in December 2014, the military has
repeatedly stated that it was targeting all terrorist groups. Presumably, this means
that the military no longer differentiates between the good Taliban, who do not
attack the Pakistani state and who could potentially be useful to have as a bargaining
chip in Afghanistan, and the bad Taliban, who attack everyone, including Pakistani
targets.

Beijing is keenly aware that Pakistans domestic problems make it a problematic ally
and partner. However, China also knows that, unless something is done to very
significantly assist Pakistan, this nuclear-armed country of 200 million could
collapse as a functioning state in the near future. Beijing knows it would not be
spared if such a nightmare scenario ever became reality. So, in addition to its
potential economic benefits, the CPEC represents Chinas best hope against regional
chaos.

For CPEC to move forward, China will undoubtedly require that the Pakistani
military continue to relentlessly hunt down the Taliban and all its ideological fellow
travelers, including in particular the ETIM, in the tribal areas. Pakistan should
undoubtedly have its own reasons for wanting this as well, having suffered some
50,000 dead and billions in lost revenue as a result of terrorist activity. The
degrading of the Taliban et al. in the tribal areas would also hurt the Afghan
Talibans ability to wreak havoc in Afghanistan, allowing the government to get on
with the job of reconstruction after 30 years of war. If such a process does not occur,
the Taliban will dominate Kabul and the ETIM would have a friendly rear base from
which to potentially launch attacks into Xinjiang Province. This is why China hosted
exploratory peace talks between the Taliban and the Kabul government, with
Pakistani army intelligence present, in Urumqi, the capital of Xinjiang, in May.

3
US relationswith Pakistan today are good, and it is important they remain so in the
future. Although the US has for all intents and purposes been displaced by China as
Pakistans major patron, it is critical that Washington remain profoundly engaged
with Islamabad. Pakistan is simply too important and too vital strategically to be
shoved to the back or even to the side. Accordingly, Washington will need to be
supportive of Islamabads counterterrorism efforts while at the same time
monitoring closely Chinas growing military and economic presence in Pakistan. Not
to do so could otherwise lead to nasty surprises down the roada road that will
increasingly be paved with Chinese power and money.

4
Pakistan China Economic Corridor

The Pakistan-China Economic Corridor (PCEC) has been rightly termed a game
changer. A careful cost-benefit analysis is required to assess for whom it will be the
game changer. The key parameters should be additional business and additional
savings.
Every day, China spends around $18 million on import of 6.3 million
barrels of oil as shipment costs from the Middle East, accounting for
80% of its all oil needs, routing through the Strait of Malacca covering a
distance of 9,912 miles. By cutting a corridor directly from Kashgar to
Gwadar, it will bring these costs significantly down to one-third of the
current levels as new distance will be 3,626 miles to Central China,
whereas only 2,295 miles till West China.

Even if China were to use PCEC only for 50% of its current level of oil
supplies, it will save around $6 million every day, almost $2 billion
every year.

It is true that these savings are peanuts to the Chinese economy,

however, the greater gain may lie in the strategic outreach via Gwadar
as its Maritime Silk Route.

There is another benefit that will accrue to China. As half of Chinese

exports are destined on its Western side, it will also gain tremendously
by saving on its containerised traffic costs.

China is one of Pakistans largest trading partners; the two-way trade

exceeded $16 billion last year, marking an annual growth of 12.57%.
While our exports to the United States and European Union earn us
trade surplus, our imports from Chinese contribute to enlarging the
trade deficit.

5
The Chinese president has promised $46 billion investment to Pakistan
and the planning minister has stated that out of that amount, $11 billion
has been set aside for infrastructure work on the corridor, while the
remaining $35 billion will be directed towards energy projects.

In all likelihood, the $11-billion amount for infrastructure purposes is a

Chinese loan whereas the $35-billion investment for the power sector is
yet to be converted into a concrete term sheet.

Consider this example. According to the Ministry of Finance, the

Executive Committee of National Economic Council, in 2014, approved
Karachi-Multan-Lahore Motorway Project construction of Sukkur-
Multan section (387 kilometres) with a rationalised cost of Rs259.353
billion or $2.59 billion.

Ten per cent cost of the project will come from the Public Sector
Development Programme and 90% of the cost as credit financing
through the government of China. This will be part of PCEC.

In the form of PCEC, Pakistan will acquire a new asset in terms of

infrastructure. However, it has to first mobilise its own industry and
trade sectors to make the best use of the corridor. Else, it will be a road
and pipeline largely meant for Chinese business on Pakistans
taxpayers cost and now protected by the Pakistan Army on our cost.

The term-sheet for Chinese investment in the power sector does not
seem very promising at the moment. The federal governments
sovereign guarantee has been called in several times by IPPs over the
last few years. The Chinese may not give it its due value.

The next alternative for them as a guarantee is a revolving letter of

credit backed by the government. That is almost a non-starter for the
6
government as it will imply special privileges to Chinese investors and
no bank can offer revolving letter of credit for the life cycle of a power
project, running over decades. The government should refuse such
requests.

What Pakistan needs to do?

If Pakistan cannot overcome its power crisis, and prepare a trade-

centric economic vision, we stand to benefit little from PCEC in terms of
additional business opportunities apart from temporary jobs. One
scenario for our planning and finance ministers is to consider imposing
a toll tax on Chinese oil shipment and trade traffic. Another possibility
is to negotiate infrastructure projects on the basis of build-own-
operate-transfer instead of an outright loan.

China needs us. Pakistan should embrace this huge opportunity with a
pragmatic, and business-like cost-benefit analysis instead of
confounding this transaction with metaphors of oceans, mountains,
honey and now iron. Its about hard cash which the finance minister
badly needs for the country. We should not leave too much cash on the
Chinese Wall.