Gwadar: A High Stakes Game For China in Pakistan

The recent reports that Pakistan contemplates granting approval to China in the near future to set up a military base at the Gwadar port in the eastern province of Baluchistan should set alarm bells ringing in Washington DC. Pakistan’s relations have been fraught, both with China and the US. The China-Pakistan Economic Corridor (CPEC), a much-touted flagship of Xi Jinping’s Belt and Road Initiative (BRI) is on hold due to the overall instability within Pakistan. The three key parameters indicating a failing economy, declining internal security,  and political instability have increasingly worried China about the fate of its investments in Pakistan. Hence protecting its stakes by taking over Gwadar port to keep its BRI initiative alive has become an important objective for Beijing. This should worry the Pentagon as the US would seek to curb any moves by China that pose a threat to US preponderance in the region.  

Since 2022 relations between China and Pakistan have been turning cold as the CPEC project virtually came to a standstill. The progress on that joint-venture was abysmally slow, much to the concern of the Chinese who refused to provide any additional economic packages to help Pakistan stave off a looming economic collapse. Pakistan’s fast tanking economy, riddled with external debt to the tune of $110 billion, coupled with a resurgent insurgency in the regions of Baluchistan and Khyber-Pakhtunwa, massive political corruption, and political instability due to the ouster of Imran Khan from power in 2023 has crippled the nation. China believes that the political risk associated with Pakistan is very high, hence it is holding off any new investments. One Chinese scholar has even compared the situation in Pakistan to those of Somalia and Syria, arguing that it is only marginally better. 

The failure to repay debt owed (to the tune of around $16 billion in the energy sector alone) to the Chinese companies that invested in CPEC has also cast shadows on prospects for future Chinese funding to kick start the second phase of CPEC, commonly called CPEC-2. The attacks on Chinese nationals within Pakistan have further complicated relations between the two countries after Beijing demanded that joint protection forces be set up to safeguard Chinese nationals and interests. Pakistan’s inability to fully address the PRC’s security concerns has further soured relations. Owing to the gradual economic freeze Pakistan has gone back to the US for a potential bailout, thereby setting up a high-stakes game between China and the US. 

In 2022 the then army chief Qamar Javed Bajwa made an official US trip to restore the Pakistan-US ties that had deteriorated after the Taliban takeover in Kabul in 2021. A slew of measures followed soon enough. The ouster of Imran Khan as Prime Minister, a military aid package amounting to $400 million for the upkeep of F-16s and other military equipment, granting counselor access to the US ambassador to the port of Gwadar and negotiations with IMF for economic bailouts were some of the steps taken to restore the relationship. Bajwa’s successor General Asim Munir has taken the same approach. All these actions added to the visible dismay of the Chinese. Beijing upped the ante by refusing a debt rollover that Pakistan was desperately seeking so as to secure the 7$billion IMF bailout. After hectic parleys, a partial compromise was reached. 

The $7 billion IMF bailout has raised the stakes in Gwadar which holds immense strategic importance for the Chinese. The IMF Article VI report categorically states “The tax system has been extensively used to provide non-transparent support through exemptions for privileged sectors like real estate, agriculture, manufacturing, and energy, as well as, through the proliferation of Special Economic Zones (SEZs). The government’s intervention in price setting, including for agricultural commodities, fuel products, power, and gas (biannual), combined with high tariff and non-tariff protection tilted the playing field in favour of selected groups or sectors. Despite all this support, the business sector has failed to become an engine of growth, and the incentives eventually weakened competition and trapped resources in chronically inefficient (including perpetually “infant”) industries.” By limiting the operalisation and the provision of new incentives to existing or new Special Economic Zones (SEZ), curtailing tax concessions and denying return guarantees, China’s scope to sign new agreements on the CPEC has been seriously diminished. By asking to renegotiate and re-profile the existing debts, the IMF bailout has subtly targeted China which imposes terms and conditions known to have distortionary effects worldwide. 

Gwadar provides access to Chinese shipping and naval forces to the Arabian Sea and the Middle East. With more than 30% of global oil and gas reserves in the Persian Gulf, the Strait of Hormuz, and the Gulf of Oman, the strategic proximity of Gwadar makes it extremely important for the Chinese. The Chinese naval presence at this critical choke point of the Gulf can challenge the Indian and US effective supremacy in the Indian Ocean and the Arabian Sea.  

Moreover, apart from Gwadar port, China is also eyeing the nearby Ormara port to construct a shipping repair dock and a submarine holding pen which will give its navy a strategic hold in the region. The SMW6 submarine cable project (South East Asia-Middle East-West Europe) which caused tensions between the US and China, leading to the withdrawal of two main Chinese companies from the project, is also on the Chinese agenda. The PRC is also eyeing the completion of the Gwadar-Nawanshahr LNG terminal project which Pakistan abandoned midway under US and Saudi pressure. In 2022 the Imran Khan-led PTI government reported that Daewoo Gas would be building the LNG terminal at Gwadar port but since his ouster, no further development has taken place. Apart from the aforementioned projects the Chinese are working to tighten their grip on the Siyadik Copper mine and other mining ventures, as well as the National Refinery’s upgrade and expansion and the completion of the Suki Kinari hydel dam. 

China aims to extend its control over Gwadar through a two-pronged strategy. China has realized that its investments in Pakistan have gone bad. There are no visible economic returns and Pakistan’s dwindling economy is in no shape to pay back the debt. Hence Beijing would like to take control of Gwadar in compensation. On the other hand, owing to the failure of Pakistan to provide full-proof security to its businessmen and workers, the PRC has been exerting pressure to set up a joint protection force. Pakistan has resisted the proposal to set up a joint protection force. Still, the recent suicide bombing attack in Karachi has further notched up the pressure from Beijing which dispatched an inter-agency working group to handle the aftermath of the bombing. 

The future path to take over Gwadar is fraught with multiple risks. Unlike Sri Lanka which went officially bankrupt, Pakistan’s economy is surviving on loans and grants. Thus any overt action to seize Gwadar using economic arm-twisting can boomerang. Also unlike Hambantota where the Chinese investments were restricted to a very small area around the port, Gwadar is part of a CPEC flagship project that stretches from the Xinjiang region to Gwadar in Baluchistan and passes through the major province of Khyber Pakhtunwa. Both Khyber Pakhtunwa and Baluchistan are plagued by homegrown insurgency and Chinese nationals have been frequently targeted, with the brunt of the violence being faced by the Pakistan security forces. Given the sheer magnitude of the insurgent attacks, the joint forces of Chinese and Pakistan forces will find it extremely difficult to secure and protect the long CPEC route. Taking casualties in Pakistan will not augur well for the Chinese Communist Party (CCP) government. Their perceived notion of Chinese invincibility will be greatly harmed, at the cost of the reputation of President Xi.  

Islamabad has started talks with Beijing on re-profiling of loans and for securing a delay on repayment of the $16 billion debt in the energy sector, along with the extension of a $4 Billion cash loan facility. So far Beijing has shown no interest in any of these requests. The Pakistan Finance Minister has already stated that any debt re-profiling will take three to four years, thereby signaling he does not expect any positive outcome. The Chinese know that the agreements give them a major advantage as they are poorly negotiated by Islamabad from a position of weakness. The debt burden is crushing Pakistan’s economy, and as the desperation grows in Islamabad to escape China’s debt trap, Beijing, instead of making overt moves, could use the negotiations to secure the effective control of Gwadar.