China, Pakistan ink new CPEC Agreement

Context: Recently, Pakistan has signed a new agreement with China to begin the second phase of the China-Pakistan Economic Corridor(CPEC).

About CPEC

• The ambitious CPEC is a 3,000-km long route of infrastructure projects connecting China’s northwest Xinjiang Uygur Autonomous Region and the Gwadar Port in the western province of Balochis tan in Pakistan.
• It is a part of China’s ambitious One Belt One Road (OBOR) Initiative to link China with Europe.
• It also includes plans to create road, rail and oil pipeline links to improve connectivity between China and the Middle East.
• The industrial cooperation agreement is a key part of what is being called “phase two” of CPEC. The first phase primarily involved Chinese investments in energy projects as well as road infrastructure.
• As CPEC entered its second phase which primarily revolved around Special Economic Zones (SEZs) development and industrialization, the need for a comprehensive Framework Agreement became imperative.
• They signed the Framework Agreement on Industrial Cooperation which aims to attract Foreign Direct Investment (FDI), promote industrialization and development of economic zones, and initiate, plan, execute and monitor projects, both in the public as well as the private sector.

Issues/ Challenges

• 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.

• The bulk of Chinese financing for CPEC schemes comprises expensive commercial loans isn’t the only worrisome aspect.
• What is more troubling is that as much as 40 percent of Chinese loans have been disbursed in a way that blurs the distinction between private and public debt, ‘doing away with the need for its disclosure as public debt.

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.

India and CPEC

India’s Sovereignty: India has continuously opposed the project since it passes through the Pakistan-occupied Kashmir territory of Gilgit-Baltistan, a claim opposed by Pakistan.

• The 1,300-km corridor is also perceived to be an alternative economic road link for the Kashmir Valley lying on the Indian side of the border.

Chinese Control Over Trade Via Sea: Located a mere 600 km from the Strait of Hormuz, Gwadar places China in close proximity to the Iran-controlled water channel, which supplies 35% of the world’s oil requirements.

• The 54-km wide Strait has been often used as a strategic weapon of self-defence by the Shi’ite nation, through a threat to choke international oil supplies.
• India, with over 60% of its oil supplies passing through the Strait (mainly from Saudi Arabia, Iran and Iraq), will be no exception.

Chinese String of Pearls: China has been increasing its presence in the Indian Ocean with the ‘String of Pearls’ ambition.

• It refers to a Chinese game-plan of encircling India through a network of airfields and ports.
• With an existing presence in Chittagong port (Bangladesh), Hambantota port (Sri Lanka), Port Sudan (Sudan), Maldives, Somalia and Seychelles, control of Gwadar port establishes complete dominance of the Indian Ocean by China.

Emergence of Pakistan as an Outsourcing Destination: Pakistani exports, mainly in the textile and construction material industry, compete directly with those of India in the US and UAE, two of the top three trading partners of both countries.

• With the supply of raw material from China becoming easier, Pakistan will be suitably placed to become a regional market leader in these sectors mainly at the cost of Indian export volumes.