Holding Yuan, Pakistan falls into Dragon trap


by Manzoor Ahmed
Pakistan’s surrender to the Chinese authority was in the making ever since China dangled the mammoth carrot of $46 billion-project called the China Pakistan Economic Corridor (CPEC) which had both the politicians and Generals drooling.Now, with the central bank of Pakistan allowing the Chinese currency, Yuan, to be used as the principle currency for trading and investment between the two countries, even the little doubt there was about such an abject capitulation to the Dragon has been wiped out.
The fear of some well-meaning citizens that the Chinese moves were nothing but an “East India Move“ to subjugate Pakistan’s sovereignty has become a reality. Although the government and their various spokesmen, both in and outside government, have been at pains to claim that the decision would benefit Pakistan immensely, very few people are willing to believe it. Most are sceptical or ignorant while a few are openly critical of Pakistan falling into the trap of the Dragon.
The Pakistani business paper, Business Recorder, in a note of caution, recently wrote that the decision would in fact help the Chinese in buying property and other assets in Pakistan while Pakistanis may stand no chance to do so in China. In the end, Pakistan could become a Yuan-debt nation with serious consequences. This is how it is likely to pan out—Chinese coming for business in Pakistan may open bank accounts and use the deposit money to lend against imports from China and thus creating, in some years, the scenario of Yuan-debt crisis. This will push the Chinese companies to convert the Yuan-debt into rupees for investment in Pakistan-based assets. As a result, the Chinese would have enough liquidity in Pakistan to invest in businesses and land, a possibility which none of the political leaders are willing to tell their people.
The Business Recorder visualised that a “likely scenario could be Chinese buying bulk of agriculture and other land, and businesses in Pakistan to increase Chinese domination in Pakistan. “
A Pakistani analyst Khawaja IkramUlHaq has been more direct and blunt: “The way things are going they might soon start purchasing power companies and power plants…the Chinese just have too much money -the next sectors that they may takeover are hotels and companies like PIA and Pakistan Steel. So, Pakistan’s future looks likely as a Chinese controlled puppet country. “
Even more conservative experts like banking officials in Pakistan have flagged similar concerns. They point out that since Pakistan is already burdened with a large and persistent deficit in its bilateral trade with China, there is an ever increasing need to replenish the supply of Yuan. Pakistan’s bilateral trade deficit with China has risen sharply, almost triple, since the signing of the swap agreement from $4 billion to $12 billion. If the swap arrangement were to extend beyond trade payments, to commercial banking or payment for services, then there is a great risk of creating a parallel currency in the country with its own complicated repercussions.
The bankers also point out that while the Chinese banking system was tuned to handle transactions in Yuan and other regional currencies, there is no evidence of the Pakistani banking system capable of dealing with Yuan payments. The banks themselves might take some time to understand and fine-tune the new currency in the market. But a bigger challenge would be for the banks to convince businessmen and other investors that dealing in Yuan would benefit them.
Then there is the question of repayment of loans and accumulated debts to Chinese companies and government. Many in Pakistan, and elsewhere, who see the Chinese initiative as a Debt Trap Enticement, cite the case of African countries and Sri Lanka to point out how countries in debt to China are eventually forced to compromise on sovereignty and pay heavily by way of granting their precious resources to Chinese companies.
For instance, Sri Lanka borrowed 301 million USD from China with an interest rate of 6.3%, while the interest rates on soft loans from the World Bank and the Asian Development Bank (ADB) are only 0.25-3%. The estimated national debt of Sri Lanka is 64.9 billion USD, of which 8 billion USD is owed to China as a result of their high interest rates. This is exactly what is happening in Pakistan with heavy loans from Chinese banks at high interest rates to fund CPEC projects. Several experts believe that it would take 40 years or near about to pay back these loans. This debt trap pressure has forced Pakistan to give extraordinary concessions to Chinese businesses including raising a special security force for their protection in the areas contiguous to the CPEC.
The hidden costs of the Chinese investment ploy might seem small in comparison but are equally damaging to Pakistan. For instance, the local markets are flooded with low-cost Chinese products. In Pakistan, this has led to the closure of nearly 200 textile mills. In addition, the Chinese companies prefer to employ Chinese workers in their project, giving little employment opportunities to the local workers; a significant part of the Chinese work force come from prisons.
The social costs of the Chinese `invasion` have already started causing concerns among the people. For example, recently a video went viral on social media sites showing a number of Chinese workers beating up police personnel who were deployed to protect them in Noor Pur camp (Khanewal, Punjab). What has riled the people is the video showing the project manager standing arrogantly on the bonnet of the police jeep in his joggers and shorts and directing the assault. The outrage on the social media sites are an indication of the upcoming troubled days between China and Pakistan, at the people’s level.
The economic and social cost of falling into the trap of the Dragon could thus prove too much for Pakistan in the near future.