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The Implications of Deepening Economic Ties Between Pakistan, China

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A series of new financial agreements between China and Pakistan are signaling a shift in political alignments in the region with implications for South Asian neighbors, the United States and for the economic future of Pakistan itself.

China and Pakistan issued a joint statement that solidified the growing economic ties between the two nations following a meeting between President Xi Jinping and Prime Minister Imran Khan in Beijing during the Winter Olympic Games.

The two countries pledged “bilateral cooperation in areas of economic and technical, industry, investment, infrastructure, space, vaccine, digitalization, standardization, disaster management, culture, sports and vocational education,” according to the statement.

The meeting between the two leaders comes in the wake of the U.S-led diplomatic boycott of the Olympic Games to protest the allegations of human rights abuses in Xinjiang, which China denies.

The high-profile meeting was meant to showcase support for Beijing in this period of diplomatic tension, analysts say.

“I think Imran Khan’s visit really shows support, Pakistan’s support, for China in the face of this boycott. So it’s a public display of support especially given the number of high-profile ministers who traveled with him to China,” said Madiha Afzal, a foreign policy fellow at the Brookings Institution.

Chinese-Pakistani economic ties

The diplomatic relationship between Beijing and Islamabad dates to 1951, and the alliance between the two countries was solidified as both countries recognized they had a mutual adversary – India – and sought to contain its dominance in South Asia.

FILE - A soldier stands guard beside the Cosco Wellington, the first container ship to depart after the inauguration of the China-Pakistan Economic Corridor port in Gwadar, Pakistan, Nov. 13, 2016.

FILE – A soldier stands guard beside the Cosco Wellington, the first container ship to depart after the inauguration of the China-Pakistan Economic Corridor port in Gwadar, Pakistan, Nov. 13, 2016.

The first trade agreement between Pakistan and China was signed in 1963 and the economic ties strengthened in 2013 with the establishment of the China-Pakistan Economic Corridor (CPEC), a collection of Chinese-funded infrastructure projects designed to upgrade Pakistan’s infrastructure and improve its economy. CPEC is a part of China’s Belt and Road Initiative.

The economic relationship is not limited to trade and CPEC, as China is one of Pakistan’s largest lenders, holding more than 27% of Pakistan’s debt.

“China doesn’t have friends and allies. China has countries which are indebted to China,” Aparna Pande, research fellow at the Hudson Institute, told VOA.

Risk to the Pakistani economy

Unemployment and poverty exacerbated by the pandemic have been indicators of Pakistan’s economic woes, with its GDP declining by 26.4% in the second quarter of 2020. The Pakistani economy has since partially rebounded.

Pakistan has been facing currency devaluation and high inflation. Last November, the International Monetary Fund revived a $6 billion bailout for Pakistan’s economy originally approved in 2019.

FILE - A volunteer serves food to people in need along a street in Karachi, Jan. 10, 2022,

FILE – A volunteer serves food to people in need along a street in Karachi, Jan. 10, 2022,

Some analysts note that the country’s unwillingness to undertake significant economic reforms contributes to its deteriorating economy.

“Pakistan’s problem is it doesn’t have enough foreign exchange reserves because the economy isn’t growing fast enough for it to get money. It is refusing to undertake structural reforms, which would enable the second and third tranches of the IMF and enable other foreign investors to invest money,” Pande said.

Tara Kartha, in an op-ed in ThePrint, an Indian online news outlet, described Pakistan’s practice of borrowing from China, paying interest, deferring repayment to other countries such as Saudi Arabia and looking to the IMF for bailouts.

This is a “classic debt trap of its own making, only getting worse over the years as Islamabad skips nimbly from one loan to the next. It’s beyond bankruptcy. It’s a state of collapse,” Kartha wrote.

But Afzal, the Brookings Institution fellow, cautioned against concluding too quickly that Chinese loans are bad for the Pakistani economy.

“It’ll depend on the terms of the loans, and China has proven to be a player which … holds Pakistan to the terms of the loans. So Pakistan can’t necessarily defer payments on those loans, even if it needs to or wants to,” Afzal said.

Geopolitical implications

Some analysts say the Sino-Pakistan joint statement symbolically confirms the growing alliance between China and Pakistan, but that it would not affect the strained relationship between Pakistan and the United States.

The once-close relationship between the two nations has become increasingly estranged because of U.S. allegations that Pakistan harbors and sponsors terrorist groups and Pakistan’s frustrations with U.S. drone strikes and what it views as a violation of its sovereignty.

“Pakistan and the U.S. both have explicitly said that they don’t want (the Sino-Pakistani) relationship necessarily to be part of those (lack of dialogue) blocks. The relationship has been strained, but I would not characterize it as strained beyond repair,” Afzal said.

FILE - State Department spokesperson Ned Price speaks during a media briefing at the State Department, July 7, 2021.

FILE – State Department spokesperson Ned Price speaks during a media briefing at the State Department, July 7, 2021.

“We’ve made the point all along that it is not a requirement for any country around the world to choose between the United States and China,” Ned Price, U.S. State Department spokesman, said at a February 2 news briefing.

When asked for comment on the potential benefits of Sino-Pakistan cooperation, the Pakistani embassy referred VOA to the joint statement, noting the deep economic ties that were announced. The Chinese embassy did not respond to VOA’s inquiry.

But for India, Pande said, the joint statement validates the country’s concerns about closer ties between two adversaries.

“It’s a dual threat on India’s continental landmass, combined with the threat on India’s maritime domain. So for India this just strengthens its belief that Pakistan is very close to China and that China continues to use Pakistan to cause problems for India,” Pande said.

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