Enter the dragon

While the architects of ‘Naya Pakistan’ were busy burning their electricity bills and even insisting that a top level trip from Beijing to the country was never scheduled, Chinese President Xi Jinping wrapped up his visit to South Asia during which deals worth billions of dollars were struck. Perhaps we are too rich or have too strong a sense of ‘honour’ to need or accept foreign capital.

The week-long visit, which took President Jinping to the Maldives (first ever by a top Chinese leader), Sri Lanka (first in nearly three decades) and India, reflects the high importance that Beijing attaches to its economic relations with South Asia. At the same time, the trip highlights the irritants in the way of an enhanced Chinese engagement in the region.

In commercial terms, South Asia’s significance for China is two-fold. One, the one billion-plus region offers an enormous market for Chinese goods and services as well as capital. China is the globe’s largest merchandise exporter and has the largest trade surplus and the biggest pool of foreign exchange reserves than any other nation.

On its part, capital scarce South Asia is in dire need of foreign assistance, mainly for infrastructure development and overcoming supply side constraints, such as energy shortage.

Trade and investment between China and South Asia are thriving. Bilateral trade has reached $96 billion, with China getting trade surplus of $54 billion. China accounts for 10 percent of the total South Asian trade, while trade with South Asia makes up only two percent of China’s global trade. This shows a lot of potential for increase in Sino-South Asia trade.

Two, regional connectivity being high on Beijing’s trade expansion strategy, South Asia, along with South-East Asia, provides a conduit for China’s access to the Indian Ocean – the world’s busiest trade route, which links China to the energy rich Middle East and West Asia and beyond that to Europe. Nearly 80 percent of Chinese oil imports are carried through the Indian Ocean.

China can access the Indian Ocean via two routes. One is to the south-west through Pakistan’s Gwadar Port developed with Chinese assistance and being run by a Chinese state-owned enterprise. The port has proximity to the Gulf region and will be connected through road and rail links to China. The other is the Maritime Silk Road (MSR) encompassing South-East Asia and South Asian countries including the Maldives, Sri Lanka, Bangladesh and India. The MSR initiative seeks to revive the ancient Silk Road corridor connecting China with Europe.

This is the reason that building ports and other infrastructure in en-route coastal countries forms an important component of China’s commercial expansion strategy. It is in this context that Jinping’s recent visit to South Asia may be seen.

In Sri Lanka, China will build a port city at the cost of $1.4 billion near Colombo. This port will be in addition to another Chinese constructed port in the small but strategically significant island nation. While in Sri Lanka, Jinping inaugurated the final phase of a Chinese financed coal power project. The two countries also agreed to enter into a free trade agreement (FTA), which would drive up bilateral trade and investment inflows. Already China is Sri Lanka’s second largest trading partner and the largest source of foreign direct investment (FDI).

During Jinping’s visit to India, the two sides struck deals providing for $20 billion Chinese investment over five years covering infrastructure and manufacturing. This is a huge amount considering that during the last one-and-a-half decade, China invested less than half a billion dollars in the mega Indian market.

Investment agreements with China are what the doctor orders for the Modi government, which won the May 2014 elections principally on the promise of an economic turnaround. China also agreed to give enhanced market access to Indian companies in IT and pharmaceuticals by dismantling non-tariff barriers.

But for the twin Islamabad sit-ins, Jinping would have visited Pakistan too and pledged hefty Chinese capital inflows into the cash-starved strategically important nation.

This rosy picture has its seamy side as well. Traditionally, both Sri Lanka and the Maldives have been India’s sphere of influence. China’s increased commercial engagement with these countries will shore up its political influence in the region and certainly will not go down well with India, which is already wary of Beijing’s close ties with Islamabad.

India and China, the two largest countries and two of the fastest growing economies in the world – not to speak of their nuclear power status – have a history of mutual mistrust, going back to their 1962 war. They are locked in a territorial dispute over the Indian state of Arunachal Pradesh, on which Beijing stakes claim. Jinping’s visit almost coincided with a stand-off between the border forces of the two countries. Border tensions had also escalated in April 2013 ahead of the Chinese premier’s visit to India.

New Delhi also continues to host the Tibetan government in exile, though it officially recognises Tibet to be part of China.  India looks at China’s nuclear cooperation with Pakistan with suspicion. On its part, China is not happy with India-US nuclear cooperation, which it interprets as running counter to its interests in the region. It also suspects that India is part of the alleged American and Japanese plans to contain China.

Although China-India trade has jumped from $17 billion in 2005 to $65 billion in 2013, China enjoys a $31 billion trade surplus. The trade imbalance, a cause of concern for India, has also in the main held back New Delhi from making progress on an FTA with Beijing.

Both China and India are among the five Brics countries that are widely predicted to dominate the global economic scene by 2050. Within the Brics, however, the two countries have had uneasy relations. For instance, in the course of setting up the New Development Bank and the Contingency Reserve Arrangement, there was a dispute within Brics over the headquarters of these institutions and the distribution of the initial capital. Underlying the dispute was (mainly) India’s suspicion that the new arrangements might be dominated by China.

Last, but not the least, are the twin problems of religious extremism and terrorism. China has long suspected involvement of some non-state actors from Pakistan in the insurgency in its energy-rich predominantly Muslim Xinjiang province and has withdrawn its support to the implementation of the United Nations’ Kashmir resolutions. During the recent Shanghai Cooperation Council (SCO) summit in Tajikistan, when the Chinese president called for a crackdown on the ‘three evil forces’ of extremism, terrorism, and separatism, he definitely had the Xinjiang unrest uppermost in his mind.

It can be safely said that the future of Sino-Pak ties largely depends on Islamabad’s success in removing Chinese suspicions. Another relevant factor is political stability in Pakistan. China is not the least concerned whether Pakistan has a civilian or a military regime as long as it is a stable polity.

Above all, foreign or domestic investment is a trust in a country’s political and macro-economic environment. Political uncertainty or unrest shakes this trust. Pakistan, therefore, needs to set its house in order if it wants to deepen relations with the Asian giant.

The writer is a freelance contributor. Email: hussainhzaidi@gmail.com