CPEC—A mutually beneficial business model


M. Ziauddin

Reports of Chinese companies negotiating buying more businesses and land, both agricultural and real estate in Pakistan have been widely welcomed by many in this country but some who keep a closer watch on such developments have also been advising extreme caution.
A couple of Chinese entrepreneurs have already snapped up two major deals— the Karachi Electricity Supply Corporation and 40 per cent of Pakistan Stock Exchange. Quoting some executives of Pakistan’s biggest firms a foreign news-agency has reported that Chinese companies were looking mainly at the cement, steel, energy and textile sectors, the four which make up the backbone of Pakistan’s $270b economy.
For agriculture, the China Pakistan Economic Corridor (CPEC)outlines an engagement that runs from one end of the supply chain all the way to the other. From provision of seeds and other inputs, like fertilizer, credit and pesticides, Chinese enterprises will also operate their own farms, processing facilities for fruits and vegetables and grain. Logistics companies will operate a large storage and transportation system for agrarian produce.
CPEC identifies opportunities for entry by Chinese enterprises in the myriad dysfunctions that afflict Pakistan’s agriculture sector. For instance, due to lack of cold-chain logistics and processing facilities, 50% of agricultural products go bad during harvesting and transport.
Enterprises entering agriculture will be offered extraordinary levels of assistance from the Chinese government. They are encouraged to make the most of the free capital and loans from various ministries of the Chinese government as well as the China Development Bank. CPEC also offers to maintain a mechanism that will help Chinese agricultural enterprises to contact the senior representatives of the Government of Pakistan and China.
The government of China will actively strive to utilize the national special funds as the discount interest for the loans of agricultural foreign investment. In the longer term the financial risk will be spread out, through new types of financing such as consortium loans, joint private equity and joint debt issuance raise funds via multiple channels and decentralize financing risks.
CPEC proposes to harness the work of the Xinjiang Production and Construction Corps to bring mechanization as well as scientific technique in livestock breeding, development of hybrid varieties and precision irrigation to Pakistan. It sees its main opportunity as helping the Kashgar Prefecture, a territory within the larger Xinjiang Autonomous Zone, which suffers from a poverty incidence of 50 per cent, and large distances that make it difficult to connect to larger markets in order to promote development. The prefecture’s total output in agriculture, forestry, animal husbandry and fishery amounted to just over $5 billion in 2012.
For the Chinese, this seems to be the main driving force behind investing in Pakistan’s agriculture, in addition to the many profitable opportunities that can open up for their enterprises from operating in the local market. CPEC makes some reference to export of agriculture goods from the ports, but the bulk of its emphasis is focused on the opportunities for the Kashgar Prefecture and Xinjiang Production Corps, coupled with the opportunities for profitable engagement in the domestic market.
This extraordinary interest of Chinese businesses in Pakistan’s most lucrative sectors has been attributed by analysts to a desire on the part of the Chinese entreprueners to make the best use of their government’s “One Belt, One Road” project to help expand. Not only this. China’s Western region contains 71.4% of mainland China’s area, but only 28.8% of its population, and 19.9% of its total economic output, as of 2009. The main components of the strategy chalked out to develop the Chinese Western region include the development of infrastructure and retention of talent flowing to richer provinces. The major projects also included construction of railways, building of hydropower stations, coal mines, gas and oil transmission tube lines as well as public utilities projects in western regions.
Chinese policymakers have allocated certain industries to core areas to match industries with local capabilities and resources. CPEC will connect this region of China with Pakistan’s sea port Gwadar through a network of rail, road and pipeline projects. Meanwhile, China’s steel giant Baosteel Group is in talks over a 30-year lease for state-run Pakistan Steel Mills.
Chinese companies have also shown interest in investing in the telecoms and auto sectors. Pakistani companies are advisedly betting that Beijing’s splurge on road, rail and energy infrastructure under CPEC will boost the domestic economy. More welcome is the fact that the Chinese interest in buying into Pakistani businesses has emerged at a time when the interest of Western investors in Pakistan is on a steep decline despite decline in militancy.
The Chinese interest comes as Islamabad and Beijing discuss the next phase of CPEC: how to build Pakistan’s industry with the help of Chinese state-owned industrial giants. Pakistani officials are drafting plans for special economic zones which would offer tax breaks and other benefits to Chinese businesses.
The major concerns about this ‘extraordinary’ Chinese investment interest in Pakistan has come from some local entrepreneurs who feel they would be out-bided out of even the local market by the more cost effective Chinese products. On the other hand, the trade unions’ fears are based on Western news-agencies’ slanted reports of alleged mistreatment of local workers in Africa in the past by Chinese businessmen.
However, what Pakistani hosts should be asking themselves is, how best and quickly they can learn from the Chinese business practices, their work ethics and the high rates of productivity that the Chinese workers have achieved. Over the past several years the assistance that we have received from the US and Western capitalist-cum-imperialist countries has come with only negligible transfer of technology and modern industrial and business methods while increasing our dependence on dole of which almost 99 per cent has been going back in various shapes camouflaged in the fine-print of the assistance agreements.
And most of this dole has come with political strings attached that constantly eat into our sovereignty. The Chinese investment interest in Pakistan, at the first sight look more like the Marshall Plan which the US had launched soon after World War 11 to enable the economies of war torn Europe to grow to an extent that would be mutually beneficial for both the donor and the recipient.
But the fact is CPEC is about development not reconstruction, unlike the Marshall Plan. The more significant difference is that the Marshall Plan had limited geographical scope. It was conceived and executed in the very specific political context of the US’s ideological and geopolitical competition with the Soviet Union in post-war Europe.
In economic terms, the closest parallel to CPEC is probably Japan’s export of capital, manufacturing and technology in the eighties and early nineties. At that time, a Japan with a very high savings rate, large current account surplus, an appreciating currency and slowing domestic growth pioneered vertically-integrated regional production networks, first with South Korea, Taiwan and south-east Asian countries and then with China. Much the same economic phenomenon is likely to occur this time with the CPEC, with China’s relative attractiveness as a source of funding and export market resulting in production integration.
Here too there are significant differences between what Japan did in the eighties and early nineties and what China is now attempting. Unlike Japan, China is a large political actor, is not dependent on the US for her security, and has the potential to be the US’s global rival across all forms of power, not just economic. Japan in the eighties was a Uni-dimensional actor offering economic benefits; today China can offer a full range of benefits to CPEC, including political and security aspects.
CPEC, indeed the Road and Belt Initiative (RBI) is a unique business model that is mutually beneficial.
However, it remains to be seen how far production integration will proceed when China herself, like the US, is on-shoring production lines and moving up the value chain in several globally integrated production networks. Global production chains have been shortening since 2008. It also remains to be seen how this will fit into China’s attempted shift to domestic demand and consumption-led growth. Presumably, that outcome will be largely determined by economic factors.

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