Until 2012, Chinese investors were hardly a hot topic in Pakistan’s business circles. Conversations were limited to Pakistan’s growing trade deficit against her “Iron Brother”, after the 2006 Free Trade Agreement helped China flood the Pakistani market with goods. Investment inflows from China accounted for only 3% of total foreign direct investment (FDI) in Pakistan between the fiscal years 2002 to 2012.
How quickly times have changed. A year after overall FDI inflows to Pakistan dwindled to a multi-year low, Chinese Premier Li Keqiang visited Islamabad in May 2013 to formulate long-term plans for the China-Pakistan Economic Corridor (CPEC). The CPEC is the most important arm of China’s One-Belt-One-Road project, and connects China’s south-west tip to sea ports in Pakistan’s south.
Since Li’s visit in 2013, FDI inflows from China have accounted for about a third of total FDI inflows to Pakistan, a source of excitement for the local business community. Yet as Pakistani businesses large and small line up in hopes of business collaboration with the Chinese delegations, an information gap prevents the meeting of minds.
“In most cases, the Pakistani government does not have enough reliable information to conduct feasibility studies for business sectors,” says Ali Salman, executive director of the Islamabad-based Policy Research Institute of Market Economy. In other cases, secrecy surrounds the CPEC; the government does not even share the project documents with local think tanks. “How can the private sector operate amid such lack of transparency?” wonders Mr Salman.
The transparency issue is partially rooted in the special favours granted to Chinese investors, favours not currently extended to investors from other countries. “The government of Pakistan has a clear regulation bias in favour of Chinese investors,” says Mr Ali, highlighting the flouting of procurement and investment regulations to help attract Chinese FDI. “But to be fair to the Chinese, this is the norm when it comes to development aid, loans or investments from bilateral and multilateral channels.”
Mr Ali’s views are echoed in business circles. Salahuddin Hanif, secretary general of the Pakistan China Joint Chamber of Commerce & Industry, agrees that Chinese investments are tied to imports of even nuts and bolts from China, often at twice the market price. But he contends that growing competition within Chinese investors will eventually force them to offer better terms to Pakistani government and private sector players.
“Rising labour costs and environmental concerns at home are forcing the Chinese to look for investment prospects in Pakistan. Scores of Chinese investors visit us daily to explore investment opportunities,” says Mr Hanif. He expects huge FDI inflows from China, especially from Shandong province, into sectors as diverse as insurance, meat production, minerals, garments and road construction machinery. Historically, however, nearly half (49%) of Chinese FDI projects in Pakistan between 2003 and 2016 originated from Beijing municipality, according to greenfield FDI monitor fDi Markets.
This excitement has left investors from other parts of the world feeling left out. “We don’t expect to become a part of the core areas of the CPEC. But we have made a formal request to the government of Pakistan to be more transparent about it and allow American and other foreign companies to compete in the peripheral sectors,” says Nadeem Elahi, president of the American Business Council of Pakistan, which represents one of the largest investor groups in the country.
Then again, as Mr Hanif says, “He who throws in the money calls the shots.” With most western investors avoiding Pakistan’s volatile economic and security environment of late, Chinese FDI inflows have been filling an important investment gap. If western investors want a piece of the CPEC pie, they’ll have to back up their overtures with cash.