ANALYSIS: How China Made a Strategic Mistake in Rebuffing Pakistan

ANALYSIS: How China Made a Strategic Mistake in Rebuffing Pakistan
Credit: Reuters / Thomas Peter
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China's decision signals to regional neighbors that Chinese partnership cannot be trusted.

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After much feet-dragging, China announced its intention to provide “multiple forms of bailout packages” to cash-strapped Pakistan. The exact nature of these financial infusions is unclear – Beijing ruled out giving Islamabad the hard cash that it desperately needs, though recent reports suggest that it might provide as much as US$2 billion in loans – but it nevertheless represents a noteworthy turnaround from mid-November, when Beijing seemed likely to nix any possible assistance.

The about-face comes after a spurned Pakistan had turned instead to Malaysia – suggesting that China has realized how snubbing Islamabad severely alienated a strategic partner, damaging its own reputation as a reliable partner and undermining its geopolitical projects in the region.

Pakistan’s economic woes

For Pakistan, Beijing’s decision is no doubt a relief since Pakistan’s prime minister Imran Khan inherited an economy on the brink. Foreign exchange reserves have plunged thanks to the previous government’s massive spending on infrastructure projects supported by China’s Belt and Road Initiative (BRI) – notably the US$62 billion China-Pakistan Economic Corridor (CPEC).

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A flagship project in the BRI and an important investment in Pakistan’s economy, CPEC burdened Islamabad with ballooning loan repayments that are threatening the country’s solvency. In 2017, Pakistan borrowed US$10.7 billion in foreign loans, more than a fifth coming from Chinese banks. In 2018, the share of Chinese loans increased to 33 percent, with the growing debt to Beijing only compounding earlier debt to Chinese banks.

Sympathy from Kuala Lumpur

Staring down the barrel of an imminent balance-of-payments crisis, Khan’s government first turned to its habitual lender, the International Monetary Fund (IMF). However, following new U.S. policy forbidding any bailout cash provided by the institution be used to pay off Chinese loans, the IMF was compelled to reject Pakistan’s requests. The details and conditions of Pakistan’s debt to Beijing remain unclear, making it unlikely that Pakistan will be able to secure loans from other institutional lenders, such as the World Bank or the Asian Development Bank.

In that context, China’s snubbing of Islamabad was doubtless considered a serious insult by Pakistan’s government, seeing how the country has found itself in these precarious financial conditions precisely because of Chinese investments. Scorned by international institutions and held at arm’s length by China, Khan turned to Malaysia and found a sympathetic ear in 93-year-old Mahathir Mohamad, Malaysia’s former strongman leader who retook office in May. In November, the two countries pledged stronger ties, including military and energy cooperation.

Islamabad’s new embrace of Kuala Lumpur was clearly registered with unease in Beijing. After all, a fledgling alliance between Pakistan and Malaysia could prove strategically painful for China. Bilateral relations between Beijing and Kuala Lumpur have soured significantly since Mahathir took power, particularly after Mahathir accused China of harboring fugitive Malaysian businessman Jho Low, whom Beijing might be using as a “bargaining chip” according to the Malaysian premier. By doing so, Mahathir dragged China into domestic political squabbles and put diplomatic relations under considerable strain.

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Credit: Reuters / Lai Seng Sin
Malaysia has seized the assets of fugitive financier Jho Low, including his yacht, Equanimity.

Low is one of the key figures in the 1MDB scandal which has taken the Malaysian media by storm and provided ammunition to rival political factions. The convoluted saga, which allegedly saw billions siphoned off a state development fund, has been highly politicized by Mahathir to go after his predecessor Najib Razak. Evidence, however, has mounted suggesting that Low masterminded the scheme, with the help of Goldman Sachs bankers.

Mahathir’s accusations regarding China and Low are emblematic of the anti-Chinese sentiment the PM has cultivated. In a sweep against both Najib and Beijing, Mahathir was quick to halt Chinese infrastructure projects to the tune of US$22 billion. These projects were agreed under Najib and came to fruition thanks to Low. Mahathir has since used the relationship between Najib, Low and China to throw shade on the former PM by perpetuating a narrative of “Chinese neo-colonialism” brought about by Beijing’s involvement in the country, much to China’s dismay.

Reflecting regional trends

With anti-Chinese sentiment on the rise in Malaysia, it’s not surprising that Kuala Lumpur welcomed a China-scorned Pakistan with open arms. But the growing pushback against Beijing has spread well beyond Malaysia and Pakistan. Beijing’s flip-flop on Pakistan amid its struggles for funding was noted with apprehension in other countries throughout the region relying on – or hoping for – Chinese cash.

For example, skepticism is rising in Vietnam, which is now balking at the 3 percent interest rate charged by Chinese official development assistance (ODA) loans, a rate much higher than the 0.4-1.2 percent for Japanese ODA. Meanwhile, other Asian countries have lost faith in China because of too much funding— rather than too little—and now find themselves juggling massive debts which are crippling their economies. In the Maldives, a pro-China president was replaced by a Sinophobe who quickly uncovered the incredible debt the country is sitting on. As Economic Development Minister Fayyaz Ismail put it succinctly: “We have been burned.”

Much like Pakistan and the Maldives, Sri Lanka had to learn of the perils of accepting Chinese loans the hard way. The Indian Ocean nation has borrowed more than US$6 billion from Beijing for ill-advised projects like a state-of-the-art airport now sitting empty, and was pressured into handing over an important deep-water port in exchange for China writing off US$1 billion of its debts.

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Credit: Reuters / Andrew Caballero-Reynolds
A Chinese engineer looks over Hambantota Port as the site is excavated in 2010. The site has since been handed over to China due to Sri Lanka's ballooning debt.

Sri Lanka is far from the only country anxious about its ability to service Chinese debt. The Center for Global Development, a non-profit research firm, completed an analysis on debt to China that will be incurred for those countries who are participating in the Belt and Road Infrastructure Investment Scheme. The report concluded that Kyrgyzstan, Laos, Mongolia and Tajikistan could find themselves vulnerable to above-average or unmanageable debt scenarios.

Given this climate of growing mistrust in its neighborhood, Beijing backtracking on its decision not to provide Islamabad with aid is not surprising. Whether Malaysia and Pakistan will continue to deepen their ties in defiance of China remains to be seen. But it is clear that initially rebuffing Pakistan was a strategic mistake that signaled to other countries that China isn’t the reliable partner it purports to be – a realization which could cause them to rethink their relationship with China and its BRI project.

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Editor: Nick Aspinwall (@Nick1Aspinwall)

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