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Chinese investment boosts Pakistan's economic growth

China's involvement is 'Trojan horse' to some, 'game changer' to others

Pakistan's first bulk terminal for handling coal and cement, built with support from China, will open in March at Port Qasim, Karachi. (Photo by Go Yamada)

KARACHI Pakistan, the world's sixth-most populous country, has embarked on a high-growth trajectory.

The nation of around 200 million people posted gross domestic product growth of 4.7% in the fiscal year that ended in June 2016, and the economy is predicted to expand by 5% or more this fiscal year. The outlook for growth encouraged Morgan Stanley Capital International to upgrade the Pakistan Stock Exchange last June from Frontier Market to Emerging Market status.

Pakistan's security situation, which was the biggest risk facing businesses operating in the country, has improved in recent years as its army has cracked down on militants and organized crime. The Overseas Investors Chamber of Commerce & Industry, made up of some 195 foreign companies and other organizations that operate in Pakistan, conducted a security-related survey of its members last June that showed 90% of respondents perceived general threats to business to have declined since August 2013, soon after the current prime minister, Nawaz Sharif, came to power.

China is helping fund $51 billion worth of projects, including ports, power plants and highways, under the China-Pakistan Economic Corridor framework. (Photo by Go Yamada)

The successful completion of the International Monetary Fund's loan program has also allowed Pakistan to restore the confidence of international investors, and the number of foreign companies doing business in the country has increased steadily.

Still, the biggest driving force spurring foreign investment in Pakistan is the China-Pakistan Economic Corridor, or CPEC, a China-led initiative to build roads, railroads and energy infrastructure across Pakistan. More than 40 projects have been identified under the $51 billion CPEC framework, and some are already underway. They include building coal-fired power plants at Port Qasim in the suburbs of Karachi and near the Thar coal mines in southeastern Pakistan, as well as extending and upgrading railroads and highways.

More than $35 billion of the CPEC investment will be allocated to energy projects. Once completed by the end of next year, power generation projects are likely to help Pakistan overcome its crippling power shortages, a major bottleneck for growth. This is a big reason the CPEC is welcomed by many in Pakistan's industry, who say it is going to be a "game changer" for the country.

China also recognizes that the CPEC initiative will help secure the quickest trade route connecting the country's western Xinjiang region and other landlocked areas to the Arabian Sea, which could facilitate economic development in the Chinese hinterland. The infrastructure development initiative will also allow China to mitigate the problem of overcapacity at home by exporting materials and equipment to Pakistan.

There are proposals to develop a power plant, an airport and highways and other facilities particularly around the port of Gwadar on the southwestern coast of Pakistan, which is strategically important for China as it provides the country easy access to the sea.

China's state-run industrial companies, such as Sinohydro and China Machinery Engineering Corp., have been assigned roles as investors in individual CPEC projects and as infrastructure developers. The total cost of work being done under the CPEC is expected to increase further as new projects, such as improvement of mass transit systems in major cities like Karachi and Peshawar, are proposed.

TROJAN HORSE? However, some in Pakistan are concerned about the massive expansion and penetration of Chinese enterprises into local industries. Recently, for instance, a Chinese-led consortium decided to take a 40% strategic stake in the Pakistan Stock Exchange, and Shanghai Electric Power acquired a controlling stake in Pakistani utility K-Electric. A Chinese company is said to have expressed interest in buying the defunct state-run Pakistan Steel Mills. Such initiatives have also raised serious concern from India and other neighbors, which are worried that China may use Gwadar Port as a military base in the future.

According to a local newspaper, $700 million of the $1.1 billion spent on CPEC-related projects in the July-September period last year was financed by loans from the China Development Bank. The amount is mainly earmarked for importing materials and equipment from China, which are needed to complete the projects.

Many in Pakistan have voiced concern over the country's rising debt obligations to China. Also, Chinese companies typically bring their own engineers and workers in large numbers to do work in Pakistan.

"Surging imports from China will damage local companies," said Ehsan A. Malik, CEO of the Pakistan Business Council, which represents 62 major companies and organizations. "Tax revenue and employment will not increase." He added, "CPEC may be a Trojan horse."

However, the logic of companies participating in CPEC is very simple. "We asked China, because nobody in the world finances coal projects," said Hussain Dawood, chairman of Dawood Hercules, a large Pakistani conglomerate that includes the Engro group, which is involved in the production of energy and chemicals.

"Investment in CPEC is not only from China," said Arif Habib, CEO of the Arif Habib group. "Companies from Germany, Denmark and Saudi Arabia are also showing interest."

Despite widespread concern about the health of China's economy, Ahsan Iqbal, Pakistan's minister of planning and development, said confidently: "The CPEC projects are a high priority for Chinese companies because they can expect good returns. Even though the Chinese economy is slowing down, the companies still have huge cash reserves."

Many Japanese companies also think the best thing to do now is to take advantage of Chinese-built infrastructure in Pakistan to expand their own business. No matter who invested, if energy and infrastructure investment gains momentum, it could stimulate Pakistan's economy.

Amid all the speculation, Pakistan is moving toward its goal of becoming the next big emerging market by gradually shaking off its reputation for terrorism, corruption and political blunders.

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