This is a review of news and analysis pertaining to the China-Pakistan Economic Corridor and related regional connectivity and security issues, covering the period of August 16 – September 13, 2018.

CPEC and the New Government

A new government in Pakistan has brought in a new set of players steering and influencing CPEC.

Khusro Bakhtiar has been appointed planning minister. In that capacity, barring any changes in how CPEC is administered, he will also serve as the chief coordinator of CPEC in Pakistan.

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CPEC and CPEC-Related Projects

• Chief minister of Khyber Pakhtunkwa, Mahmood Khan, says he will ensure that the province gets its fair share in CPEC. These sentiments were also echoed by another PTI figure, National Assembly speaker Asad Qaiser. Khan is eyeing not just road and rail infrastructure projects, but also investment in mineral processing, energy, and tourism.
• PTI to investigate mass-transit projects, reports GEO News. This includes the Orange Line metro rail project in Lahore, a CPEC project.
• New climate change advisor says Pakistan is locked into coal deals. Malik Aslam described the Sahiwal Coal Power Project as a “potential disaster” but said that it is under a “water-tight legal agreement.” He said the government will enforce environmental provisions in the contract.
• Pakistani business council body chairman recommends renegotiation of CPEC electricity deals.
• China awards 140 higher education scholarships to Pakistani students, reports Pakistan Today.
• China Road and Bridge Company to provide scholarships for Pakistani engineering students at top Chinese university. The students will enroll in transportation-related masters programs in engineering at South East University, one of the world’s top 300 universities.
• Islamabad to post top bureaucrats in Balochistan to improve provincial capacity in implementing CPEC projects, reports The Express Tribune.
• Sindh provincial government establishes economic zones management company to manage SEZs, reports DAWN.
• Work on a special economic zone in Mirpur, Azad Jammu and Kashmir has begun, according to The Express Tribune.
• CPEC boosts tractor sales in Pakistan, reports DAWN. According to the Pakistani daily, “38,620 tractors were sold in the first nine months of 2017, compared to 22,169 units during the same period in 2016.”
• Hong Kong-based third-party logistics provider to enter Pakistan to leverage growing Belt and Road transshipment.

Gwadar

• Gwadar’s needs to be addressed on an “emergency” basis, declares top CPEC body. Pakistan’s Samaa TV reports that the CPEC secretariat housed in Pakistan’s Planning Commission said that a new plan will be developed for Gwadar. The CPEC secretariat also stated that unplanned private sector construction should be discouraged. The planning minister also reviewed plans for the Gwadar city master plan update, which has yet to be completed. It was to have been revealed on August 14. The new chief minister of Balochistan, Jam Kamal Khan, also urged that the issues of “basic infrastructure and potable water” in Gwadar receive “immediate attention.”
• Newly-elected legislator from Gwadar says the city is in the “Stone Age.” Aslam Bhootani — the winner of the National Assembly seat from Gwadar in the July elections — bemoaned the shortages of electricity, gas, and water in the city. Bhootani defeated two formidable opponents, reportedly due to his tough criticism of CPEC progress. During the elections he said, “No truck will pass from Gwadar to Kashghar if CPEC does not give the people of Gwadar their rights.”
• Pakistan and China agree to expedite Gwadar projects, including a new airport, technical institute, and hospital.
• National University of Modern Languages will establish a campus in Gwadar, reports the Daily Times. Other universities and satellite campuses are also planned for the area.
• Pakistan’s petroleum minister discussed with Chinese Ambassador Yao Jing the possibility of developing an oil city in Gwadar, accordingto The News.

Economy and Trade

The Big Picture

Imran Khan’s inaugural address to the nation as prime minister — delivered on August 19 — was almost exclusively focused on the country’s socio-economic predicament. There was little discussion of foreign affairs, terrorism, and large-scale infrastructure projects. Instead, Khan focused on the country’s fiscal health, environment, and human development. The prime minister bemoaned the high rates of stunting, infant mortality, and illiteracy, as well as the growing national debt.

The policy debate, however, has been overtaken by efforts to crowdfund the $12 billion-plus Diamer-Bhasha and Mohmand dam projects — an initiative led by the chief justice of Pakistan and supported by the army. Khan backed the effort in his second national address on September 7. As of September 11, the fund has raised roughly $24 million. The dam initiative could distort policy priorities and public spending.

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• China proposes bilateral trade with Pakistan in yuan, reports Pakistan Today.
• China’s largest brokerage house returns to Pakistan after 17 years. CLSA, a subsidiary of CITIC, has acquired a 24.9 percent stake in Alfalah Securites.
• Chinese hybrid wheat pilot project boosts productivity in Pakistan. Field trials have resulted in an increase of yields by 24.4 percent, according to an official with the state-owned company Sinochem.
• Mango export to China likely to exceed target (APP)
• ADB commits $6 billion from 2019-21 for infrastructure development in Pakistan. The Asian Development Bank director general visited Pakistan and expressed concern over the lack of progress with CPEC rail and public transport projects, according to a report in The News. The report suggested that the ADB and JICA remain interested in funding the Karachi Circular Railway project.
• Special Economic Zones in the Sindh province have received approximately $410 million in investments, according to a Sindh government official.
• Emirati company to build billion-dollar medical city in Pakistan. The UAE-based MBF Group said it will build a $970 million medical city within a gated community in Islamabad. The company announced similar investments in Egypt and Saudi Arabia earlier this year and is constructing private hospitals throughout the UAE.
• ANALYSIS — Why Does Pakistan Have Repeated Macroeconomic Crises? (Center for Global Development) Masood Ahmed, president of the Center for Global Development, writes: “the two principal causes of macroeconomic problems have been the imbalance between public sector spending and income, and Pakistan’s underdeveloped export base, which makes the country highly vulnerable on the external sector.” He recommends that Pakistan have “a national discussion on what kind of economy it wants to be in 10 years, and then it must agree on the actions needed to get there.”

The Belt and Road

• China hosts third Forum on China-Africa Cooperation (FOCAC). Lina Benabdullah of Wake Forest University notes that Beijing pledged the same amount this year as it did during the previous meeting ($60 billion), but grants combined with interest-free and concessional loans make up a bigger piece of the pie, growing from $5 to $15 billion. Unexpectedly, China did not move forward with funding the second phase of the Standard Gauge Railway in Kenya.
• Malaysia cancels Chinese-backed infrastructure projects that had been suspended in July, including three energy pipelines. Malaysia is also reviewing a $20 billion rail project that is part of the Belt and Road Initiative, according to the Financial Times. Mahathir told the New York Times that the project “could have been developed by a Malaysian company for less than half of the $13.4 billion contract won by the China Communications Construction Company.”
• Xinjiang-Central Asia trade bottlenecks removed. Transport of goods from border town Khorgas, which borders Kazakhstan, to Russia has been reduced from 10-15 days to five days, reports China Daily.  “Customs clearance in Kazakhstan used to take a whole day, but now it is only two hours,” said a Chinese fruit and vegetable exporter.
• Sections of Xinjiang’s longest railway bridge joined, reports Xinhua. The 24.6-km-long bridge runs along a 1,213.7km railway line that runs from Korla in Xinjiang to Golmud in Qinghai province. The railway line, which is slated for completion in 2020, strengthens north-south connectivity in western China, linking Xinjiang and Tibet by rail.
• Missed bond payment in Xinjiang stirs Chinese debt fears (WSJ)
• World’s largest textile mill for colored yarns opens in Xinjiang, reports Xinhua. Huafu Fashion Co. Ltd. — the world’s largest supplier of melange yarn — is opening the $735 million facility in Xinjiang’s Aksu region. Xinjiang is China’s largest cotton grower and Aksu produces 93 percent of China’s long-staple cotton.
• REPORT — India’s Answer to the Belt and Road: A Road Map for South Asia (Carnegie India)
  The value of this report stems from its ability to X. But it actually demonstrates that India has no real answer to the Belt and Road.
  https://carnegieindia.org/2018/08/21/india-s-answer-to-belt-and-road-road-map-for-south-asia-pub-77071
• REPORT — China’s Belt and Road is Full of Holes (CSIS)
  According to the report, “a statistical analysis of 173 infrastructure projects finds that Chinese investment is just as likely to go outside those [Belt and Road] corridors as within them.”______I also recommend this informative interview with Andrew Cainey of Chatham House by Brink Asia. Cainey argues that bringing in private-sector investment in BRI “rests on how all sides create bankable opportunities with commercially attractive sub-projects, even if the economic returns from the main project are long term and uncertain.” Those opportunities require the “acceptance of competitive open tendering on contracts—so China accepting more transparency in at least some projects and giving up some control to market-based decisions.” He notes: “Without private financing, the number of new infrastructure projects will inevitably run up against the financing limits of Chinese policy banks.”

Regional and Strategic

• Zarif visits Pakistan, emphasizes Chabahar-Gwadar convergence. Iranian Foreign Minister Javed Zarif said that no third country can spoil ties between Iran and Pakistan. He met with his counterpart, Shah Mahmood Qureshi, who said that “Pakistan stands with Iran in this hour of need” and criticized the U.S. exit from the Iran nuclear deal. Zarif also met with Prime Minister Imran Khan and chief of army staff Gen. Qamar Javed Bajwa.
• Chabahar’s future remains uncertain. Afghanistan and India will seek waivers from the impending U.S. secondary sanctions on Iran. Ahead of the 2+ 2 dialogue, a senior U.S. official said that Washington is seeking all partners to bring Iranian oil imports to “zero.” In New Delhi, U.S. Secretary of State Mike Pompeo said that waivers will be considered “where appropriate,” but reiterated the U.S. expectation that “purchases of Iranian crude oil will go to zero from every country.” An Iranian minister said that port operations will be handed over to an Indian company within a month.
• Afghan troops will receive training on Chinese soil, says Afghan Ambassador to China Janan Mosazai. The Chinese Foreign Ministry denied a South China Morning Post report that it was establishing a military base in Afghanistan’s Wakhan Corridor. China could supply military hardware including transport helicopters.
• Pakistan Navy launches independent maritime security patrols in the Indian Ocean region. Pakistan has moved two of its units from the multinational Combined Task Forces 150 and 151 toward independent operations, according to a report in The News. The Pakistan Navy will not only patrol the country’s expanded Exclusive Economic Zone, but will also engage in anti-piracy operations in the Indian Ocean region from the Gulf of Aden to Sri Lanka.
• Pakistan Navy conducts joint maritime training exercises with Egypt in the Mediterranean, with an apparent focus on maritime interdiction and anti-piracy operations.
• Pakistan Navy Chief’s address on Defense Day: “With the development of CPEC, referred as Corridor of Prosperity’ and the Gwadar Port as its ‘hub and pivot’, maritime security all along our coast, particularly off Gwadar has assumed special significance. Pakistan Navy is vigilant and folly ready against any conventional or asymmetric threat to Pakistani ports and maritime infrastructure given the national importance of CPEC Project. Pakistan Navy is also contributing as a key player in the regional collaborative maritime security. Furthermore, in view of the evolving regional dynamics and to pursue national interests with strategic autonomy, Pakistan Navy has recently instituted Regional Maritime Security Patrols in the IOR with the aim to maintain a robust security posture in critical sea areas and choke points of the IOR. Pakistan Navy has also reinvigorated its efforts to revive the maritime sector and promote blue economy to contribute substantially towards the national economy.”
• How ‘America First’ could jump start Iran-Pakistan pipeline project. “Pakistan could soon be presented with the option to re-export imported Iranian gas as LNG,” writes Iranian analyst Hamed Kermani in Al Monitor.
• TAPI project plagued by land acquisition problems, reports TOLO News. According Afghan officials, only 45 percent of the land acquisition has been completed. An Afghan legal advisor on TAPI says that much of the land is privately-owned and some disputes have gone to the courts.
• Indian influence in Nepal continues to erode. Due to bipartisan pressure, Nepali Prime Minister K.P. Oli ordered the cancelation of Nepal’s participation in BIMSTEC joint military exercises being held in the Indian city of Pune this week. According to the Times of India, Nepal has only sent three “observers” instead of a 35-member delegation that would have included its army chief. Oli has pressed Prime Minister Modi of India to revive SAARC. An unnamed Nepali source told the Times of India that New Delhi should cease viewing BIMSTEC as an alternative to SAARC. Nepal will participate in its second-ever joint military exercises with China this month. These developments also come as Nepal has said that China will allow it to access to four of its seaports and ports. This may reduce Nepal’s dependence on India for the transit of oil and other commodities, but road connectivity between Nepal and China is poor.
• Indian strategist Bharat Karnad: New Delhi should actively seek cooperation with Islamabad to push it out of Beijing’s orbit. In a commentary for Bloomberg Quint, Karnad – a former member of India’s National Security Advisory Board – proposed that India work with Pakistan to resolve the Kashmir dispute, give Pakistani industry access to Indian markets, and even conduct “high-level military exchanges and joint war games with the Pakistani military.” Karnad writes that by giving Indian overland transit trade access to Afghanistan and Central Asia, Pakistan would earn toll revenue in addition to royalties from the IPI and TAPI pipelines.
• With Ships and Missiles, China Is Ready to Challenge U.S. Navy in Pacific (NYT)
  ______Finally, I highly recommend this two-part interview with former U.S. diplomat Chas W. Freeman, Jr. on the Sinica podcast. Ambassador Freeman is a polyglot and polymath skilled in the arts of diplomacy. As a young State Department official, he had a close-up view of the opening of relations between the United States and China. In this wide-ranging podcast, he shares a host of enriching anecdotes as well as some valuable comments on the role of empathy in international relations analysis.
  • Part 1
  • Part 2