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Belt and Road

Pakistan benefits from China-India clash with hydropower deal

Himalaya tensions also give Islamabad opportunity to make a case for debt relief

Pakistani Prime Minister Imran Khan has two agreements in as many months from Beijing to fund hydropower projects in Pakistan-administered Kashmir. (Nikkei montage/Reuters/EPA/Jiji)

QUETTA, Pakistan -- A $2.4 billion deal between Pakistan and China for a massive hydropower project in Kashmir shows how three nations are vying to out-flank one another in the Himalayas, a disputed territory existing on a knife's edge that recently experienced a deadly clash between Chinese and Indian border forces.

China, Pakistan and the Kohala Hydropower Company, a subsidiary of China Three Gorges Corporation, late last month signed the deal. It calls for the construction of a 1,124-megawatt hydropower plant that is expected to be a key piece of infrastructure along the China-Pakistan Economic Corridor, itself part of Chinese President Xi Jinping's Belt and Road Initiative.

This will be the largest investment in a single independent power producer in Pakistan, according to local news reports. It is also the second mega-project China has agreed to fund in Pakistan-administered Kashmir in the past two months. In May, the Power Construction Corporation of China was awarded a contract to build the Diamer Bhasha dam as part of a joint venture. That dam, 320 km from the Chinese border, will also be financed by China.

Experts say China is willing to fund the Kohala hydropower project in an attempt to neutralize India's stance regarding China-Pakistan Economic Corridor construction in disputed Kashmir. India says no projects should be undertaken in the region, but the latest Sino-Pakistani deal undermines this.

The clash came in May, when Chinese and Indian troops engaged in fistfights and attacked each other with sticks and stones in a part of the Himalayas known as Ladakh, where India has opened the Darbuk-Shyok-DBO Road, prior to their deadly hand-to-hand combat in June. This 255-km road, which starts in the Ladakh town of Leh, allows Indian troops to easily take up positions 20 km from the Karakoram pass, which separates Ladakh from China's Xinjiang autonomous region and is a key route along the China-Pakistan Economic Corridor.

Andrew Small, a senior transatlantic fellow with the Asia program at the German Marshall Fund of the U.S., believes that in the past China had been careful to choose projects that would allow it to maintain to India that the corridor does not alter the status quo in Kashmir.

"At first glance, the Kohala [hydropower project] would seem to represent a break from that," Small told the Nikkei Asian Review, adding that China will indeed be less willing to respect Indian sensitivities on these issues going forward.

Last week, the Balochistan Liberation Army -- which has been calling for the separation of the largest of Pakistan's four provinces for decades now -- attacked the Pakistan Stock Exchange in Karachi because Chinese companies have a 40% stake in the bourse. Immediately, Pakistani Prime Minister Imran Khan blamed India for the attack. "There is no doubt that India is behind the attack," he told Pakistan's parliament on Tuesday.

"By blaming India for [the] stock exchange attack, Pakistan has tried to gain the sympathies of China," said James M. Dorsey, a senior fellow at the S. Rajaratnam School of International Studies at Singapore. Dorsey added that Pakistan is trying to exploit Indo-China border tensions for its own financial benefit.

Right after the announcement of the Kohala hydropower project, Indian media alleged the presence of Chinese troops in the Gilgit-Baltistan region, part of Pakistan-administered Kashmir. They alleged that China is trying to use Pakistani Kashmir to incite violence in India-administered Kashmir. Maj. Gen. Babar Iftikhar, a spokesman of Pakistan's armed forces, took to Twitter to reject India's claim.

Mohan Malik, a professor of strategic studies at the National Defense College UAE, says that exploiting India's vulnerabilities is an essential element of China's "contain India" policy. Beijing is prioritizing dam and hydropower construction projects in Pakistan-administered Kashmir over other corridor projects "to spite New Delhi," he told Nikkei.

Malik added that Pakistan is undoubtedly the largest beneficiary of the China-India military face-off. "The looming threat of a two-front war with China and Pakistan is New Delhi's worst-case scenario," he said.

Moreover, it was revealed in an audit report by the power division of Pakistan that two Chinese companies had inflated the costs of power projects in the corridor by $3 billion. The revelation has made it easy for Pakistan to ask China to delay repayment schedules for corridor power project loans.

Experts believe it is possible that Pakistan can receive a grace period on repaying loans tied to the Kohala hydropower project in light of the inflated costs scandal. "China prefers to make new offers or give leeway on payment timings rather than renegotiate the original contract terms, which [China] would see as setting a problematic precedent," Small said.

Malik agrees, adding that Islamabad could take advantage of the crisis to renegotiate unfavorable loan terms regarding financially unviable projects.

Dorsey, the international studies scholar in Singapore, offers a slightly different take. He says China sometimes uses financial corruption for political gain. "In the case [of the scandal]," he said, "it remains to be seen who was the beneficiary of the cost inflation."

He said it would be difficult for Beijing to acquiesce to a request of debt relief from Pakistan as doing so would compel Beijing to do likewise with a flood of similar requests from other Belt and Road countries.

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