Courtesy Reuters

China's Pakistan Conundrum

The End of the All-Weather Friendship

China is often called an "all-weather friend" to Pakistan -- a strategic partner, a reliable source of trade and aid, and Islamabad's closest military ally. Pakistani Prime Minister Yousef Raza Gilani has described the friendship between the two countries as "higher than mountains, deeper than oceans, stronger than steel, and sweeter than honey." In September, he told the visiting Chinese Public Security Minister Meng Jianzhu, "Your friends are our friends," continuing, "your enemies are our enemies, and your security is our security."

But do things look so straightforward when viewed from Beijing? To be sure, Chinese money pours into places Western cash fears to tread. But Beijing is not oblivious to risk. In fact, Chinese money flows disproportionately to investments that carry little to no risk and deliver returns that, however modest, are predictable. Moreover, at least some Chinese companies have proved willing to abandon investments as their perception of risk has risen. In September, for example, Kingho, a large private Chinese miner, is reported to have abandoned a proposed $19 billion investment to build a coal mine and power and chemical plants in Pakistan's Sindh province after reassessing investment and security risks.

Indeed, Beijing's investment calculus is increasingly based on a sophisticated balancing of three types of risk: geopolitical, political, and financial.

Geopolitical risk (not least China's rivalry with India) has long led Beijing to support Islamabad through thick and thin. Friendly ties between the two help satisfy four Chinese strategic objectives: They ensure security and stability in China's western provinces and along its continental Asian border; anchor China's poorer western provinces in a web of cross-border economic activity; bottle up India in the subcontinent, forestalling the emergence of a continental-sized rival and precluding more extensive Indian security activities in East Asia; and assure that no other major power, particularly the United States, advances its interests in continental Asia at China's expense through, for instance, military deployments or permanent access arrangements.

In recent years, these four objectives have become ever more pressing, reinforcing Beijing's inclination to support Pakistan. Take the issue of securing China's western border. The drawdown of U.S. forces in Afghanistan will, unavoidably, prompt serious questions in Beijing about Kabul's capacity to maintain security. That, in turn, will prompt still larger questions about whether Pakistan and Central Asian governments can suppress extremist groups and ideologies that may emanate from Afghanistan and Pakistan's tribal areas and bleed across the Chinese frontier.

Beijing also aims to use Islamabad to box out New Delhi in Afghanistan and the broader region. Thus, India's expanding reach into East Asia is no doubt reinforcing China's reflexive tilt toward Pakistan. Until now, India has been, at most, a third-tier Chinese strategic concern -- distantly behind internal insecurity and challenges in the East Asian littoral. But India's rapid economic growth has given it a growing strategic profile beyond South Asia. India is becoming an Asian power and a global player. It is deepening defense ties with Australia, Japan, Singapore, and Vietnam, four countries that are wary of China's rise and also are increasingly close to the United States. And New Delhi has signed free trade agreements with South Korea, Singapore, and the Association of Southeast Asian Nations (ASEAN), as well as a comprehensive economic partnership with Japan. As India's strategic reach expands, a continuing rivalry with Pakistan that preoccupies its diplomacy and pulls its attention back to its own neighborhood remains a net positive for Beijing.

Through this traditional geopolitical prism, then, Beijing's relationship with Islamabad appears unassailable. But Beijing no longer has the luxury of looking exclusively through this single lens. Increasingly, it also balances the political, and especially financial, risks to its interests.

Chinese nationals in Pakistan have come under unprecedented attack in recent years. And Beijing is ever more sensitive to protecting those citizens -- mostly engineers and other skilled workers -- abroad. Libya proved a watershed in this regard because of the scope and sheer scale of the Chinese presence there. The onset of violence yielded a robust debate in China about the state's responsibilities to its citizens overseas. Sensitive to domestic perceptions and pressures, Beijing undertook its largest ever noncombatant evacuation, removing some 35,000 Chinese nationals from Libya by chartered merchant vessels, chartered and military aircraft, and overland buses. The Chinese navy also dispatched a frigate to support the operation, an unprecedented long-range operational deployment.

This means that Islamabad cannot forever presume that Chinese workers and money will stay in Pakistan if those assets come under attack on a larger scale. Beijing has shown little stomach for telling Islamabad to rein in anti-India insurgent groups that operate from Pakistan, such as Lashkar-e-Taiba. But those groups that have killed or kidnapped Chinese nationals are another matter. And China appears to have begun sorting and distinguishing these anti-India proxies from domestically focused groups, such as the Baloch separatists or pro-Taliban elements that could pose a more existential threat to Chinese interests. Balochistan has seen repeated attacks on Chinese nationals, including a 2004 bombing that killed three engineers working at the Gwadar port and a 2006 attack on a bus near Hub. In response to one kidnapping case, conducted by elements associated with the Lal Masjid in Islamabad, Beijing placed ferocious pressure on the Pakistan army to intervene.

But it is investment risks, not geopolitical or political ones, that are more likely to alter China's long-standing calculus in Pakistan. Chinese money generally follows the flag, yet global trends suggest that Beijing is becoming vastly more sensitive to investment constraints and macroeconomic conditions. It is often taken for granted that Chinese companies can bear more risk than their Western counterparts and that Beijing will underwrite the kinds of investments from which most other governments and firms would shy away. But as China's global reach has grown, so, too, has its economic incentive to revisit these practices.

There are, for example, intriguing parallels between China's conundrum in Pakistan and the problem it faces in Europe. In both cases, debt-laden economies have aggressively sought to attract a portion of Beijing's considerable stock of investment capital -- its $3 trillion pool of foreign exchange reserves. But Beijing is weighing such activities against the many problems it must now manage at home. Investment in such environments has grown more difficult to sell domestically. As one pithy post put it on Weibo (a Chinese version of Twitter): "Better to save [debt-burdened] Wenzhou than to rescue [debt-burdened] Europe!" And when China does invest abroad, it is under enormous pressure to ensure a positive return.

So it matters more than ever that Pakistan faces an array of economic constraints, including a debt-to-GDP ratio that crossed 60 percent in 2010; painful debt service obligations to its creditors; a large fiscal deficit; double-digit inflation; a depreciating rupee; a trade deficit worsened by high global commodity prices; and above all, the lack of a credible growth strategy. Chinese financiers will be increasingly skeptical of the returns on investment into such an economy. And here, too, domestic politics come into play. Most of China's population has been left out of the growth miracle of the reform era, and the resultant income and development gap is economically and politically unsustainable. To address the problem, Beijing has been trying to redistribute resources to less wealthy inland provinces that are increasingly important to political stability. Road and infrastructure construction in Pakistan, as well as a bilateral free trade agreement, are tied to Beijing's effort to develop these regions. But these projects will increasingly need to meet higher expectations for returns than did China's traditional low-strings approach to aid.

All this means that China's calculus in Pakistan is becoming more diverse. The central question will be the extent to which political, and especially investment, risks begin to complicate the straightforward geopolitical calculus that has long yielded a remarkable intimacy between Beijing and Islamabad.

To be sure, Beijing is too strategically tied to Pakistan -- and too timid in its diplomacy, in any case -- to off-load an erstwhile ally. But China is unlikely to be such an accommodating patron, either. Thus, it will prove less willing to fund the ambitious infrastructure development schemes Islamabad favors. And what is more, the scope and scale of future Chinese economic activity will not, in itself, produce rapid, sustained, and balanced Pakistani growth. In the long term, economic interaction with India -- the restoration of traditional regional ties and natural economic affinities in the subcontinent -- will almost certainly be more decisive.

The bottom line is that China will not simply "bail out" Pakistan with loans, investment, and new untied aid, as commentators watching the deterioration of relations between the United States and Pakistan seem to expect. Rather, China's involvement in the country will closely reflect Beijing's own priorities and evolving risk assessments.

For its part, the United States, which has failed to induce greater Chinese "pressure" on Islamabad, may be able to take advantage of China's new calculus to pursue complementary approaches focused on economics and finance. Countervailing interests, including China's effort to hedge against a growing U.S.-Indian partnership, will continue to obstruct strategic coordination between the United States and China in Pakistan, especially on anti-India and Kashmir-focused militant groups. But the more the two countries' economic threat assessments converge, the more Beijing and Washington should be able to turn a shared but abstract interest in Pakistan's "stability" into more complementary policies.

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