Background of CPEC

The reliable and steadfast friendship between China and Pakistan is considered as an example all over the world and the economic benefits of this friendship for Pakistan are getting more eminent day by day.  The rising of China as an International Economic Power is proving advantageous for Pakistan. Regardless of the detrimental law and order situation in Pakistan, Chinese investment is increasing. Along with the governments of both the countries, the business leaders of private sectors are also playing an important role in strengthening economic relations.

China is a huge economy which is gaining importance in Global Economic scenario. Pakistan is geographically attached to China, thus, by taking advantage of China’s modern technology and experiences, we may strengthen Pakistan’s economy.  Nature has bestowed Pakistan with all types of resources in abundance and a friend like China complements the elements of growth. Now, the need of hour is proper planning and its implementation.

The World has now become a global village and we cannot survive without connecting to the neighboring countries. China has its place as a strong pillar in Pakistan’s foreign policy. The project of Gawadar port is an important sign of stronger Pak-China relations. In May 2013, Gawadar port project was officially handed over to China.

The objective of this project is to facilitate trade between both countries by building an economic corridor. According to the details, the trade route will start from Kashghar towards Khunjerab and passing through Islamabad, Multan, Lahore, Sukkur shall reach to its end at Karachi and Gawadar port. Already built roads like Karakoram Highway and motorway shall be upgraded and railway lines shall be mended. New roads, railway lines and dry ports shall also be constructed. Shah Faisal Afridi added that apart from transport sector, the meeting of Joint Working Group has also finalized 16 new projects of generating energy from wind, water and coal.

CPEC significantly shortens China’s trade route to the Middle East and Africa

Pakistan economic corridor would reduce distance between China (Kashghar, 4,376km away from Beijing) and the Persian Gulf to 2,500 km as opposed to the existing distance of 13,000 km and reduce shipping time from current 45 days to just 10 days. Besides this:

▪     China will be able to make attractive financial returns as all these projects are being done in an investment mode, returns on which would be much better than the US treasury instruments where China parks bulk of its foreign exchange.

▪     The projects would help Chinese firms and labor as machinery used in the infrastructure projects would be procured from China and the projects would also employ a large number of Chinese labor

▪    The Gwardar-Xianjiang route will also provide China with access to the Indian Ocean and the Middle East’s vast trade in petroleum, an important factor in securing access to long term raw material supplies. The route can also serve as an alternative to the Malacca straits, which China currently uses to access the Middle East, Africa and Europe.

Impact of China Pak Economic Corridor

• The economic corridor is not only the road to the economic prosperity of Pakistan, it can be termed as the future of the world. It is estimated that about 3 billion people from China, South Asia and Central Asia, would be benefited from the economic corridor. It has the potential to empower half of the world’s population living in Asia, by developing special trade routes between China and Pakistan. Economic Corridor is the most important agreement signed between Pakistan and China till now.
• The corridor, after completion, will serve as a primary gateway to trade among China, Middle East and Africa through Pakistan. Particularly, the oil from the Middle East could be offloaded at Gawadar, which is located just outside the mouth of the Persian Gulf. The Oil would be transported to China through the Baluchistan province in Pakistan. Such a link would vastly cut the 12,000-kilometres route that Mideast oil supplies must now take to reach Chinese ports.
• Analysts proclaim that the proposal, when implemented, “will re-open the economic artery blocked for years, realize the interconnection in transport, trade, investment and finance and build a new Euro-Asian economic roadmap benefitting countries along the Silk Road and even more.” There is no dearth of energy and recourses in Central Asia which would be available to others in the region, which is likely to become the biggest market in the world and would contribute to regional stability and prosperity.
• China has planned numerous mega projects to be started at Gawadar that would be tremendously beneficial for both countries. In this regard China is planning to replicate the model of Shanghai free Trade Zone at the sideways of Economic Corridor. Remarkably, Under the Early Harvest Program, China had planned to pump $50 billion up to 2017 into a host of projects in Gawadar including coal, solar and wind energy units enabling Gawadar to create a nexus between Pakistan, Iran, China and Central Asian States that would ultimately generate billions of dollars in revenues of Pakistan’s kitty besides creating endurable job opportunities.

• The Free Trade Zone at Gawadar would also introduce similar incentives to the foreign investors as are offered in the Shanghai Free Trade Zone, which will turn Gawadar into a hub of foreign investment. Both the Pakistani and Chinese governments are eager to invest in this plan. It is expected that the establishment of the special economic zone, free trade zone, an export processing zone in the port city would create innumerable job opportunities for Pakistan’s skilled and unskilled manpower, which will ultimately raise the living standard of the people of Pakistan.

Current projects Under CPEC

While information sharing from official sources remains less-than-ideal, a review of the media sources and cursory channel checks on CPEC linked projects indicate that wheels are already in motion. More specifically:

▪       Gwadar deep seaport Gwadar, operated by China Overseas Port Holding Company (COPHC) under a 40-year lease, handled its first private container vessel on May 11th, 2015.

▪    100 MW Quaid-e-Azam Solar Park in Bahawalpur owned by Punjab Government and built by China’s Tebian Electric Apparatus Stock Co Ltd was inaugurated on 6th May. Capacity would be enhanced to 1000MW by FY18.

▪       A 50-megawatt windmill  project  in  Jhimpir,  Thatta,  was  inaugurated  on  12th

May’15. The project is owned by UEP, a company owned by United Energy Group.

▪   Financing agreement related to 870MW Suki Kinari hydropower project between EXIM Bank of China, Industrial and Commercial Bank of China Limited and SK Hydro (Private) Limited was signed recently. Financial close is expected to be announced by Jan-Feb’16

▪    China Three Gorges South Asia Investment Limited has accelerated the land acquisition for 720 MW Karot Hydropower Project. The project’s financial closure, which was initially scheduled for Aug-16, will likely be reached by Dec-15.

Important facts

• China Pak Economic Corridor (CPEC) could be a game changer: Chinese President signed MOUs and agreements for projects worth USD46bn during his visit to Pakistan in Apr’15. With bulk of these projects likely to be implemented during the next three years, keeping expected general elections of 2018 in view, we believe this investment would likely have significant positive consequences for Pakistan’s economic growth.
• Chinese investments can lift FY16-18 GDP growth beyond 6% through direct impact: We expect local component of this investment to be around USD18bn, assuming a higher local component for investments in Hydel, Road, Rail and Gwadar Port (50% to 80%) and lower for Machinery intensive coal based power plants (20%). This alone could add 2.1pp to GDP growth each year during FY16-18 and raise GDP growth above 6%.
• Indirect impact is likely to be much larger: Bulk of this investment is related to setting up+15,000MW coal based power plants, 74% of existing capacity. Resulting security of electricity supplies would yield a snowball effect on the private sector investment activities. Private investment to GDP averaged 9.6% during the last five years as opposed to 12.7% during the preceding five years. At the same time, private sector credit to GDP has fallen to 12.6% (Jun- 08: 28.2%) whereas banking sector’s ADR has fallen to 52% (Dec-08: 83%).
•  Pakistan’s medium term GDP growth potential could rise above 6% based on historical ICOR: USD46bn Chinese investment will augment annual Investment to GDP by 5.3pp and will add 1.5pp to Pakistan’s annual GDP growth potential in the medium term based on a historical Incremental Capital Output Ratio (ICOR) of 3.6x. Assuming this leads to mobilization of USD15bn (1/3rd of Chinese investment) in incremental private sector investment during this period, the increase in growth potential could be as much as 2.0pp. If these investment levels sustain, Pakistan’s growth potential can rise above 6.0% assuming last year’s GDP growth rate (4.1%) as a base.
• China is going to be an equal beneficiary; if not greater: While bulk of the investment will likely go into coal based power plants, the investment theme revolves around the China- Pakistan economic corridor. The proposed trade route of China-Pakistan economic corridor will reduce distance between China (more specifically Kashghar in Xinjiang Province, 4,376km away from Beijing) and the Persian Gulf to 2,500 km as opposed to the existing distance of 13,000 km from Beijing to the Persian Gulf and reduce shipping time from 45 days to 10 days.
• There have already been further developments in some projects under CPEC: Gwadar deep seaport, operated by China Overseas Port Holding Company (COPHC), handled its first private container vessel on May 11th, 2015. 100 MW Quaid-e-Azam Solar Park in   Bahawalpurbuilt by China’s Tebian Electric Apparatus Stock Co Ltd was inaugurated on 6th May. A 50-megawatt windmill project owned by a local subsidiary of United Energy Group, in Jhimpir, Thatta,  was inaugurated on  12th  May 2015.  Progress on  870MW  Suki  Kinari hydropower project and 720 MW Karot Hydropower Project has also accelerated.
• Stock market impact: Investment led growth in GDP would augment volumes and earnings of Cement and Steel companies while higher income levels and improved energy availability would help the manufacturing sector through higher demand and cheaper and secure energy supplies. This should help improve feasibility of expansions, expand margins and accelerate earnings growth. Banks would witness accelerated balance sheet growth and a higher share of lending in the asset mix which will likely augment NIMs. Consumer stocks would also benefit from the higher demand and income levels.