China’s “Debt Trap” in Pakistan: The Risk of Diluting the FATF Ruling

12 July 2018 Major-General S. B. Asthana (Retd), SM, VSM, FDI Associate


Under normal circumstances, a one billion dollar loan between two sovereign countries would have gone unnoticed by global the community, but what makes China’s one billion dollar lending to Pakistan so special is the timing of the loan and the strategic intention behind it. The economics of this loan, which is allegedly to support Pakistan’s dwindling foreign currency reserves that have nosedived to US$9.66 billion from US$16.4bn in May 2017, taking China’s lending to Pakistan to over US$5bn in this fiscal year in the process, have been well covered by all the segments of media in India and elsewhere. The messaging and the strategy behind this bailout, however, call for deeper analysis.


Timing and Messaging

The timing of the loan, which raises eyebrows, is that it comes immediately after Pakistan being officially included in the grey list of the Financial Action Task Force (FATF). The FATF is a global body (of which China is also a member) that aims to combat international money laundering and the financing of terror organisations. It appears to have decided to add Pakistan to its grey list because Pakistan has, in its perception, failed to act against terror financing on its soil. China tried its best to help its “all weather friend” by responding that Islamabad is doing its best to fight terrorism and has made enormous sacrifices in that endeavour. The aid package, therefore, appears to be an indication of China’s resolve to keep Pakistan economically afloat irrespective of the FATF ruling. China is apprehensive that if Pakistan sinks economically (if it does not, for instance, receive the IMF aid package for which it plans to bid after its elections), it could well be the case that China may not find enough investors for elements of its ambitious China-Pakistan Economic Corridor (CPEC) project. Were that to happen, its own business organisations may find it difficult to sustain the project. That could put at risk President Xi’s Belt and Road Initiative (BRI) and overall grand strategy to rejuvenate China. With this gesture, therefore, China appears to be trying to raise the confidence level of its investors in the CPEC/BRI, despite running the risk of criticism of diluting the FATF’s judgement and despite knowing that Pakistan cannot pay the interest on its loan and that it will need further loans to repay its interests at a time when its economy is sinking.

Why China Finds Pakistan Lucrative

Pakistan’s geographic location is strategically important to the United States and China. Both those countries, consequently, would like to have an enhanced degree of influence over it. For the US, Pakistan is important in order to keep its competitors under check and for bases from which it can launch operations in Afghanistan, especially against al-Qaeda and the Taliban, while also expecting Islamabad to take stern action against the Haqqani network. As Pakistan provided the bases and manpower to enable the US to prosecute its war in Afghanistan against the Taliban, it received billions of dollars from Washington in the form of civilian and military aid packages, besides military hardware. While those assets were meant to be employed in Islamabad’s struggle against terrorist and insurgent forces on its own soil, it used them instead to fund and equip insurgent strikes against India and, in some instances, against American goals in Afghanistan. That double game has now backfired; President Trump has mostly blocked American aid to Pakistan and reduced much of the remainder because he is convinced that Pakistan did not do enough to target al-Qaeda and the Haqqani network and that it continues to help those organisations. The US refuses to cede this strategic space to China, however, ensuring that the strategic competition in the region is not over yet.

China needs to retain a South Asian presence as well as proximity to Iranian oilfields. Its presence in Pakistan and its ties to Islamabad also serve to keep India off-balance. Access to Pakistan’s arable land and agricultural produce will help to ensure China’s own food security while CPEC and the related infrastructure also give China an opportunity to utilise its overcapacities in Pakistan. These efforts could see Pakistan fall further into the debt trap that China has set for it, ensuring that Pakistan is unable to service its loan debts, which could result in a Chinese land grab, as well as a resource grab à la Sri Lanka. Since it is also in China’s strategic interest to keep the US out of the region, Beijing endeavours to keep Islamabad economically afloat and, consequently, indebted and beholden to it.

Risk of Becoming a Chinese Colony

From a global perspective, as well as the Indian one, Pakistan’s financial crisis is dangerous. If China continues to bail it out whenever required to do so, Pakistan’s status will be reduced to something akin to that of a colony of China. That situation could lead to a considerable and semi-permanent PLA presence in Pakistan under the pretext of protecting China’s CPEC and other investments in the country. If that happens,it could see a rise in the number of insurgent and terrorist groups that operate there against the PLA. The ensuing violence could easily spill over into India, requiring New Delhi to focus more on its western border than it does with China. The crisis could be exacerbated if one or more of those groups acquired some or all of the nuclear weapons that Pakistan currently holds. There is also the danger, however remote,that elements of the Pakistani military may become radicalised in their efforts against the PLA. It is time for the global community, including China, to revisit its support to Pakistan.

About the Author

Major-General Asthana has 40 years of defence experience at the national and international levels. During his military carrier, he held various key appointments in the Army and the United Nations and was awarded twice by the President of India and twice by the UN. He retired from active Army service in 2014 and is presently the Chief Instructor of all courses for military officers in the United Service Institute of India. Maj-Gen Asthana is a life member of various think-tanks, including the Institute of Defence and Strategic Analysis, USI of India and the Centre for Land Warfare Studies. He has been interviewed by various Indian and international media channels and has written for the Economic Times, Washington Post, Guardian and South China Morning Post. He researches international issues, mainly pertaining to China, and has authored over 79 publications and 85 blogs. In addition to delivering talks on strategic issues in various universities, he is an external examiner for the MPhil degree at Panjab University. Maj-Gen Asthana is a doctoral researcher at Jawaharlal Nehru University, holds two MPhil degrees, a Post-Graduate Diploma in Human Resource Management and various management degrees.

Any opinions or views expressed in this paper are those of the individual author, unless stated to be those of Future Directions International.

Published by Future Directions International Pty Ltd.
Suite 5, 202 Hampden Road, Nedlands WA 6009, Australia.