China – Pakistan Economic Corridor: Implications and Challenges of Beijing’s Latest Initiative

August 8, 2017

Schwarzman Scholars worked together to create an academic journal, reflecting their ability to think critically about the Middle Kingdom and the implications of its rise. These collections of thoughts come together to form “Xinmin Pinglun,” our Journal dedicated to the publication of the informative and analytical essays of our scholars. As the application deadline for the class of 2019 is approaching and the arrival of the incoming class is on its way, we are sharing pieces from Ximin Pinglun to give insight into the critical thinking and scholarship taking place at Schwarzman College. Here, Anurag Chandran (Class of 2017) shares his thoughts on the China – Pakistan Economic Corridor (CPEC) and its goal of re-inventing the Silk Road. 

Announced in 2013, and led by Chinese President Xi Jinping’s vision, the One Belt, One Road Initiative (OBOR) aims to revive the ancient Silk Road trade routes connecting Asia with Europe, the Middle East, and Africa. The China-Pakistan Economic Corridor (CPEC), a crucial component of China’s OBOR initiative, is a multi-billion dollar infrastructure investment project that aims to connect China’s Xinjiang province to Pakistan’s Gwadar port through a network of roads measuring around 3,000 km. In addition, China ambitiously projects the completion of all construction related to CPEC by 2030. The timely completion of CPEC can send a strong message to the world that OBOR is not just an ambitious proclamation, but a sincere effort to revive the glory days of the Silk Road.

What is OBOR?

An economic corridor is a project of strategic development aimed at increasing economic growth over a certain period of time in a specific area. An economic corridor creates domestic, regional, and global chains which connect economic nodes, leading to positive multi-sectoral spillover effects. In general, economic corridors tie together production, trade, and infrastructure within a specific geographic territory, the benefits of which also extend to rural areas through transportation development and production expansion.

OBOR is divided into two major development projects: The 21st Century Maritime Silk Road and the Silk Road Economic Belt (SREB). While the CMSR is a path through several bodies of water such as the South China Sea, South Pacific Ocean, and Indian Ocean linking China with the Mediterranean Sea, the SREB intends to connect China with Europe via high-speed railroads, highways, energy distribution systems and fiber optic networks. The SREB consists of three corridors: The Northern Corridor that connects Beijing to Moscow, Germany and other European states; the Central Corridor that connect Shanghai to Europe via Iran; and the Southern Corridor that begins from Guangzhou and ends in Pakistan via Xinjiang. The Southern Corridor will be realized by CPEC. As CPEC is located at the intersection of SREB and CMSR, it is a critical project of OBOR.

CPEC: Economic implications and challenges

Chinese Premier Li Keqiang initially envisioned CPEC during his visit to Pakistan in May 2013. Under CPEC, China will construct highway and railway links that run through most of Pakistan starting from Gwadar port in Balochistan and concluding in Kashgar in western China. The highway and railway links will also pass through parts of Balochistan, Sindh, Punjab, Khyber Pakhtunkhwa, and Gligit-Baltistan, after which they extend to China through the Khunjrab Pass.

According to U.S.-based consulting firm Deloitte, CPEC has been divided into two phases: The first, which is slated to be completed in 2017, consists of the Gwadar International Airport and major developments for the Gwadar port. The second includes the expansion of Karakoram Higway, the road that connects China and Pakistan, and laying of fiber optic lines to strengthen communication between both nations.

Deloitte estimates the cost of CPEC’s completion at $45-75 billion devoted to ensure that the economic corridor is operational by 2020, and the remaining to provide for energy generation and infrastructural development. CPEC is expected to add 700,000 new direct jobs between 2015-2030. It is also estimated that if all the planned projects are completed, Pakistan’s growth rate could be enhanced by 2.5 percentage points. Further, the value of all projects together would exceed all foreign direct investment in Pakistan since 1970. This alone would be equivalent to Pakistan’s 2015 gross domestic product.

When it comes to infrastructural development, China is investing approximately $11 billion into developing CPEC projects in Pakistan. These include construction of the 1,100 km long motorway that connects Karachi and Lahore, renovating the main railway line between Karachi and Peshawar (due to be completed in 2019), reconstruction of the Karakoram highway that connects Rawalpindi to the Chinese border, and extension of Pakistan’s railway network to connect with the southern Xinjiang railway in Kashgar, China.

Energy is yet another sector in which CPEC-related development will benefit Pakistan. Pakistan has acute energy shortages, which have caused an estimated 2.5% drop in Pakistan’s annual GDP, according to the Wall Street Journal. CPEC will lead to the construction of energy infrastructure worth over $33 billion. The goal is to establish power plants capable of producing upwards of 15,000 MW of energy – which is 74% of Pakistan’s existing capacity. Between 2018 and 2020, CPEC will lead to the construction of over 10,400 MW of energy generaiton capacity – about 46% of existing capacity.

The main opportunity of CPEC is that it offers China easier access to its markets in Asia, Europe, and beyond. Currently over 80% of China’s imported oil is transported over a distance of about 16,000 km through the Strait of Malacca to Shanghai, a process that takes over three months. Once Gwadar port is completed and ready for use, it will significantly cut this distance, reducing it to about 5,000 km. Upon reaching Gwadar port, oil from the Middle East can be transported to China via CPEC, reducing the additional 11,000 km journey to about 2,395 km—reducing the total distance by about 78%.

Apart from the benefits of reduced transportation time and costs, China also stands to benefit enormously from its $45.6 billion investment in CPEC. Funding in terms of investments and loans are expected to come mainly from Chinese banks and corporations. The corridor will be built on a BOT (build-operate-transfer) basis, according to Pakistani researcher Safdar Sial. This means that as a result of financing by Chinese entities, the projects will be completed by Chinese companies, especially state-owned enterprises (SOEs).

“The main opportunity that the completion of CPEC presents China is easier access to its markets in Asia, Europe, and beyond.”

The revenues generated by the BOT-related facilities are expected to cover costs and provide a sufficient return on investment. Chinese companies working on CPEC in a BOT capacity are also expected to receive concessions from the Pakistani government to finance, design and operate the projects. The government may also provide support in the form of provision of land. As a result, Chinese companies will be able to operate the infrastructure and energy development projects as profit-making entities.

For example, in February, 2013, the control of Gwadar port was transferred to China Overseas Ports Holding, a state-owned enterprise. It is now undergoing a large-scale expansion to turn it into a full-fledged, deep-water commercial port. China believes that CPEC to help bridge the differences in development between the more prosperous eastern region of China and the under-developed western side, especially Xinjiang province. CPEC should lead to more interest in expanding economic activity to Xinjiang for both SOEs and private companies. This will lead to a rise in job creation and increased consumption of goods in the region. This resource-rich area can then potentially turn into a developed, prosperous part of China.

While from the previous sections it may appear as if both China and Pakistan stand to benefit enormously from the completion of CPEC, there may be numerous challenges that can hinder its effective completion. The following subsections look into some of the potential challenges.

There are concerns regarding the rates of success and quality maintenance of Chinese investments. Research shows that there has been a steady decline in the delivery rate of completed capital projects. One expert calculates this dip in delivery rate: it was about 74-79% in the late 1990s but is now below 60% – implying that 40% of all Chinese investments are either not finished on time or not completed at all. Other studies show that ineffective investments have cost China a total of $10.8 trillion since 1997- an amount that was almost the entire GDP of China in 2013.

Another concern is that a large section of CPEC passes through territory that India and Pakistan have heavily disputed since independence from the British. The Karakoram Highway passes through Gilgit-Baltistan in Pakistan-occupied Kashmir, and India has vehemently opposed any further developments in the region. This situation stands to further escalate tensions between India and China – in effect leading to instability in South Asia.

“It is increasingly clear that CPEC is a game-changer for both China and Pakistan.”

There are several security-related threats that may destabilize the construction and development process of CPEC. The presence of terrorist groups such as Tehreek-e-Taliban Pakistan (TTP) and other sectarian groups are a big concern, as they may play a role in deterring Chinese investors and companies by conducting attacks. While these groups originate in Pakistan, Xinjiang province also faces threats from Uighur separatists as well as the terrorist group East Turkestan Islamic Movement. As such, heightened attentino to security is crucial to ensuring that CPEC undergoes construction and completion smoothly.

It is increasingly clear that CPEC is a game-changer for both China and Pakistan. For Pakistan, it can provide infrastructural that can uplift its economy and energy production. This is crucial to Pakistan’s progress, as the country does not have the capability or means to achieve this growth on its own. Concurrently for China, CPEC provides an opportunity like none other: cutting over 11,000 km in navigation distance for its oil imports – saving time and millions of dollars for the country. Although certain challenges may hinder the completion of CPEC, it stands to become one of the most important developments in China’s OBOR initiative.

Anurag Chandran (Class of 2017) is from India, and graduated from the University of Missouri-Columbia.