Andrew Small on China-Pakistan Relations

Andrew Small is a senior transatlantic fellow with GMF's Asia Program, which he established in 2006. His research focuses on U.S.–China relations, Europe–China relations, Chinese policy in South Asia, and broader developments in China's foreign and economic policy. He was based in GMF’s Brussels office for five years, and worked before that as the director of the Foreign Policy Centre's Beijing office, as a visiting fellow at the Chinese Academy of Social Sciences, and an ESU scholar in the office of Senator Edward M. Kennedy. His articles and papers have been published in The New York Times, Foreign Affairs, Foreign Policy, the Washington Quarterly, as well as many other journals, magazines, and newspapers. He is the author of the book The China-Pakistan Axis: Asia's New Geopolitics published with Hurst / Oxford University Press in 2015. Small was educated at Balliol College, University of Oxford.

Reyna Wang CMC '19 interviewed Andrew Small on Nov. 29, 2018.


Pakistan’s new Prime Minister Imran Khan was in China for a four-day visit last month. One of his main purposes was to look for aid from China to save Pakistan from the current financial crisis. How serious is Pakistan’s financial crisis and how will the crisis affect Pakistan’s ability to pay back loans connected to the China-Pakistan Economic Corridor (CPEC) projects?

The immediate crisis for the Pakistani government relates to its balance of payments crisis, where China has provided some financing through short-term loans to help Pakistan through the immediate phase of the crisis. The CPEC loans do not necessarily have any immediate impact yet because Pakistan is on a grace period for most of those payments. If Pakistan has to start an IMF program however, that could involve cuts to CPEC projects, demands for a higher level of transparency around CPEC projects, and potentially broader cuts to Pakistani government expenditure. This would not only have a macroeconomic impact but also an effect on the kinds of CPEC projects that could go ahead. None of this would significantly affect Pakistan’s immediate-term capacity to meet payment commitments on existing CPEC projects though. This is still a manageable short-term crisis.

The one short-term issue is with the sovereign guarantees that the Pakistani government provided, relating to energy payments. The Chinese companies involved in the energy projects are funded by loans from Chinese financing institutions, with the Pakistani government guaranteeing a specific rate of return and a specific pricing level. If there are payment problems, the Pakistani government is expected to fill in the gap. In recent months, the Pakistani government has been facing some difficulties closing that gap, due to their weak budget situation, and Chinese companies have been complaining about that. On the longer-term loan questions, things like the writing down of Chinese debts are not expected in the context of an IMF negotiation. That said, it is very difficult to get clarity on the terms of the BRI loans in the case of Pakistan or in a number of other cases. There are even cases in which a new government comes into office and still doesn’t necessarily have a comprehensive picture of all the financing issues.

Broadly speaking though, I don’t expect a short-term impact on existing CPEC financing. Apart from the sovereign guarantee on the energy projects, there is not much that the government has to pay back, except for the loans that the Chinese government has provided to help them through the immediate crisis. Those loans were provided on a short-term basis and are separate from CPEC financing.


Did China’s Belt and Road projects contribute to this crisis or was it completely a mismanagement by the Pakistani government?

The answer is a bit of both. Pakistan has routinely gone through currency crises. It ran into these problems every few years even before China got involved. Few in Pakistan are blaming China for the crisis. Nonetheless, CPEC has contributed in part, which is one of the reasons that the Chinese government has been helpful with some of the short-term financing issues. They are aware that the free trade agreement, signed prior to and separate from CPEC, has not been particularly advantageous for Pakistan. Moreover, a number of CPEC related imports have had an impact on Pakistan’s balance of payments situation. Nonetheless, in other economic circumstances, the Pakistani export sector should have been sufficiently robust for these imports not to cause a problem. But the export sector has also been underperforming, a problem that the CPEC energy investments were supposed to help address. The Pakistani export sector has been doing badly in part because the energy crisis decimated parts of the export sector that were successful. The hope was that reliable energy supplies would help to support the rebuilding of Pakistani exports. But there are longer-term structural issues within the Pakistani economy that have gone unaddressed.


Saudi Arabia is going to provide $6 billion rescue package to save Pakistan’s economy, which, however, is not enough because Pakistan is still planning to seek $8 billion bailout from the IMF. Washington has pressured the IMF not to provide funds for Pakistan to pay its loans to China. How will the IMF respond? Will the U.S. government do more to interfere? Will Pakistan face a choice between the CPEC and the IMF?

The rounds of talks between Pakistan and the IMF so far have not produced any definitive resolutions. The talks will be picked up again in January. There are two issues in play for Pakistan’s dealing with the IMF. One is the financial assistance to deal with the short-term crisis. Although the Chinese will continue to provide short-term financing to help Pakistan roll over the immediate crisis, they also want Pakistan to go to the IMF and it appears that they will not provide more significant financing until that is resolved. The second thing is that if Pakistan is able to agree an IMF program, Pakistan can then gain access to financing and loans from other international bodies as well.

In terms of U.S. involvement, Pompeo’s remarks about Pakistan and the IMF took place in the context of his laying out the free and open Indo-Pacific economic strategy, which did not just focus on Pakistan. They were targeted more broadly at China and the BRI. In general, the U.S. thinks that the IMF should not be bailing out the economic problems created by the BRI. This is a matter that extends beyond the Pakistan case. In this instance, it does not appear that the U.S. has been pushing the IMF particularly hard to refuse to provide financing. Rather the U.S. is asking for more transparency on the Chinese loans relating to CPEC. The IMF also wants to understand the overall financial position that Pakistan is in before providing a package. That would mean more clarity about what sort of financing is coming from the Chinese side.

Pakistan has been reluctant, probably at China’s instigation, to provide the level of transparency that the IMF requires right now. The U.S. is pushing for greater scrutiny. But again, this is an issue that goes beyond Pakistan. We are seeing greater opacity in the sources of financing alongside a rising debt burden in the developing world. The Pakistan case is partly a test case for the way the IMF will deal with this problem.

There is not really a “choice” for Pakistan between CPEC and the IMF. It does look like China has been pushing Pakistan to go into the IMF negotiations. The Chinese don’t want to take full responsibility for the financing of Pakistan’s economic problems, nor even co-responsibility with the Saudis. Like many creditors, China would like to see Pakistan go through an IMF program and have the kind of credibility that would come from fulfilling an IMF program. China also doesn’t want to take the responsibility for pushing Pakistan to do some unpleasant things to its national budget and then be blamed politically for making these demands. China, in any case, lacks the expertise of the IMF in sending in teams to dig around Pakistan’s finances and make recommendations. Equally, China is not comfortable providing financing on unconditional terms on the scale envisaged. It doesn’t want to put itself in this position where it becomes the financier for other Belt and Road countries when they run into crisis. So China does not want Pakistan to choose China over the IMF. China is likely willing to provide financing in conjunction with the IMF but not as an alternative.  

In terms of cancellations or renegotiations of CPEC projects, the IMF side would likely have the greatest concerns about projects that involve a high level of Pakistani government expenditure and in which the expected returns are dubious. To take one example, this ML-1 railways line, which is the upgrading of links between Karachi and Peshawar, is one of the focal points of the new government’s negotiations with China. It is one of the projects that the IMF could well have held up, even if the new government hadn’t already identified problems with it and might go on the chopping block. While it is unlikely that this would apply to projects that have already been agreed upon, there is still a large portion of CPEC projects that are not finalized. It would be easy for a number of them to be put on ice.


Prime Minister Khan once expressed doubts about the CPEC, saying that it is too heavy on infrastructure. I read about your comments on the VOA website and you said: “Beijing is willing to make adjustments, but it needs to know what the administration’s position is before it can make offers.” Can you talk more about that? What kind of adjustments could China possibly offer? Will China cancel some projects?

The last Pakistani government came to power with an agenda, and the Belt and Road was a very good fit for what they wanted to do. The Pakistan Muslim Lea­gue-Nawaz had a focus on fixing Pakistan’s energy crisis and was historically keen on big infrastructure projects. So, the BRI was a very good fit. The Pakistan Tehreek-i-Insaf and Imran Khan personally have tended to be supportive of CPEC as a principle, but critical of the manner in which it was implemented. He criticized the fact that it was not transparent enough and too related to Punjab (the PML-N’s powerbase). Furthermore, it provided insufficient benefit to the economically disadvantaged provinces of Pakistan, such as Khyber Pakhtunkhwa (the PTI’s powerbase). There is also the corruption issue. Pakistan was trying not to call out the Chinese too directly on this, but it has been one of the primary campaigning points for the PTI.

Now on the Chinese side, they want Pakistan to implement all the existing commitments, which extend to around 19 billion dollars, a figure that includes projects that are underway or completed. While keeping this piece of the CPEC package unchanged, the Chinese are happy to review with the other tens of billions of dollars’ worth of projects that are in varying stages of negotiation: they are willing to talk about new ideas and to be accommodating.  

The problem the Chinese have is that they don’t have a very clear picture about the new government’s priorities. Going into Khan’s trip, China was still looking for clarity on what the new government actually wanted. China has also been dealing with the fact that some of these concerns played out in public. Statements from ministers and advisors have been quite critical. The level of enthusiasm for CPEC and the China relationship from the new government is clearly lower. Khan broke a pattern and did not make his first overseas trip to Beijing. China was the fifth country that he visited. If you talked to anyone in the Pakistani foreign office after the election took place, the expectation was that he would visit China first. That was the traditional protocol.

The challenge for China is that the PTI’s criticism is directed at the model itself of how China’s investment takes place in Pakistan rather than just the specific project priorities. There was already a slowdown on CPEC going into the election, because the previous government couldn’t negotiate and finalize deals during a period of political turmoil. The Chinese also wanted to see where things came out with the elections. Now there is another short-term freeze as the new government negotiates the parameters of the next phase of CPEC. We don’t yet know how this will come out. Apart from Pakistan, China is also involved in some other difficult renegotiations, like the Malaysian case. China expects Pakistan to be easier to deal with than Malaysia, given Pakistan’s close security relationship with China. But even that hasn’t necessarily been the case so far.

It is unlikely that there will be an openly acknowledged downscaling of CPEC: there’s too much political investment in this on both sides. There are also other options for China that go beyond their dealings with the civilian government – the Chinese will also be looking to the army to make sure they get the right outcome and to sustain the image of CPEC.


Would you say that the relationship between China and Pakistan is cooling off and what is the biggest difficulty that China faces in deciding what to do with Pakistan?

The China-Pakistan relationship traditionally has focused on security and military issues. The economic relationship has been a minor component in the overall relationship. With CPEC, that had changed. What China is trying to do in Pakistan through the CPEC projects leaves it far more embedded in day-to-day political and economic life. When CPEC runs into problems, as it has with the new PTI government, that certainly has an impact on the overall tone and nature of the relationship. The army is not going to take on the responsibility for implementing the projects.

Nonetheless, what China is looking for in Pakistan has not changed in a fundamental way. There’s always a possibility that if CPEC faces difficulties the relationship can revert to the more traditional pattern with more economic activity and investment than before, but with the lower profile security relationship taking the priority again. That’s probably what’s going to happen in the next period of time. If you didn't have the level of political sensitivity attached to it – the fact that this was to become the flagship of the BRI, with so much resulting attention on these projects – it would be able to quietly decelerate in the way that has happened in the past in China’s economic relationship with Pakistan.

In other parts of South Asia, China is attempting to stabilize ties with India, which also has ripple effects for the China-Pakistan relationship. What CPEC was supposed to achieve was to effectively put the China-Pakistan relationship on a higher footing, that would lift it well beyond the traditional security parameters. This is certainly a phase in which Pakistan is expected to look more to China as a strategic supporter, even with some of the current CPEC difficulties. However, there won’t be the kind of on-going upward trajectory in the relationship that you saw from 2014 to 2016. It will level off or dip most likely in the next period of time. Nonetheless, there are other structural factors in play, which means you won’t have any dramatic re-balancing of the relationship, because the fundamental things that China wants from Pakistan haven’t necessarily changed so much and vice versa.


Reyna Wang CMC '19Student Journalist

Dan Scavino Jr. [Public domain], via Wikimedia Commons

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