China’s $50bn Investment in Pakistan is Only the Start for Asia’s New Economic Belt

Chinese Businessman holding business card with China Flag
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China is wasting no time in realising its stated aim of creating a new economic belt stretching from China to Europe. In what is sure to be a sign of bigger things to come, China has set about investing US$50 billion in neighbouring Pakistan to improve that country’s infrastructure.

No one quite knows what percentage of the investment is coming directly from the Chinese government, and what share the Asian Investment Infrastructure Bank (AIIB) is supplying. But as China has provided all of the AIIB’s existing capital reserves, that question matters less than it might seem.

If you’re not familiar with the AIIB, it’s no different to the International Monetary Fund (IMF). Both institutions lend capital to member nations in the form of loans. Both are tools for achieving respective foreign policy aims. Having the power to influence who gets loans gives China a greater say in regional politics.

The AIIB differs to the IMF only in that it’s a Chinese run institution, as opposed to the US-dominated IMF. Currently, the AIIB has 57 member nations, including most Asian nations. It also has several US allies in its ranks, including Australia and Britain. Not surprisingly, the US has refused to seek an application to join the bank.

None of this will matter to Pakistan. A US$50 billion dollar investment from China is double what the US has invested in Pakistan in more than a decade.

Why China is investing in Pakistan

China’s decision to invest in Pakistan’s infrastructure will lead to the construction of roads and railways linking south western China with the Gwadar port in southern Pakistan. The entire project has a completion date set for 2030.

The Chinese see Gwadar port — which is already Chinese operated — as an important part of their new economic belt because it gives them access to the Indian Ocean. This will secure China’s shipping trade between the Indian Ocean and the South China Sea. It will also allow for cheaper movement of resources and other goods into China, bypassing land routes to the Chinese coast.

In return, Pakistan will see six cities build new public transport infrastructure, including underground metros in key cities. A new 1,250km motorway completed this year will link Pakistan’s two largest cities, Karachi and Lahore. And in what could be the most interesting development, a new economic city — styled on Hong Kong — will be developed in Gwadar as a free trade zone.

But the benefits of Chinese investments go beyond the immediate economic boost for Pakistan. Nawaz Sharif’s government can use the corridor between China and Pakistan to strengthen their control over neighbouring Afghanistan, and contain the growing power of their bigger neighbour, India.

China wants to connect Pakistan with Iranian gas

Due to the lack of fuel for its power stations, Pakistan often has severe electricity shortages, which creates problems for its 182 million people.

Pakistan hoped that a gas deal with Iran would ease the pressure on their electricity shortages. Iranian gas is the cheapest option for financially troubled Pakistan. But Pakistan has been unable to see this project through — put forth initially in 1995 — after US pressure forced them to back down on trading with Iran.

The US would prefer to see Pakistan import gas from Turkmenistan, instead of its rival in Tehran. That means that the Pakistani portion of the pipeline remains unfinished. And that’s where China comes in.

China is going to invest $2 billion to help complete the project, and will link the pipeline to Gwadar port. That would potentially open up Iranian gas — with the second highest gas reserves in the world at 33 trillion cubic metres — to a whole new market in Asia Pacific. And it could come into direct competition with Australian natural gas exports.

With the Iranian nuclear deal expected to reach some kind of compromise this year, that’s given Pakistan renewed strength in moving ahead with the project. The lifting of hefty economic sanctions will open up Iran to more deals on the level that Pakistan now wants to finalise.

China has other incentives for investing in Pakistan

China also sees their relationship with Pakistan as a means of stopping the spread of religious extremism in its western province of Xinjiang. Pakistan is a Muslim majority nation, and China hopes the partnership will allow Pakistan to play a role in easing terrorist activity in the region.

In a further boon for China, it seems likely their investment has convinced Pakistan to buy eight new Chinese submarines, worth up to US$5 billion.

China’s desire to create a new economic belt is already taking shape in east and central Asia. But that’s only the start. We’ll be hearing much more about Chinese investment in the region, particularly through the AIIB, in the coming years.

With Australia now a Prospective Founding Member of the AIIB, we’ll benefit from the increased investment in the region through new opportunities for our mineral exporters. But we’ll also have to compete with increased competition in natural gas as central Asia and the Middle East becomes more connected with growing markets in east and south eastern Asia.

Mat Spasic
Contributor, The Daily Reckoning

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The Daily Reckoning offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, The Daily Reckoning delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors. Founded in 1999, The Daily Reckoning is published in 7 countries with a worldwide readership of almost 1 million people.
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