Strengthening ties with China

The China Pakistan Economic Corridor (CPEC) project is a multi-billion dollar behemoth which is making its impact felt in a variety of ways. As India continues to grow its bilateral ties with Pakistan’s other neighbours, we have little choice but to look to our friend in the north to act as a balancing force. It has been this way for decades and the process has picked up pace with the introduction of more and more initiatives to increase and consolidate China’s holdings in Pakistan. Western governments and businesses have virtually given up on us and any economic growth we have now is bound to be linked with China. It is no wonder then that Pakistan is eager to curry favour with the Chinese.



Most recently, Pakistan and China’s tax authorities have signed the third protocol of the Avoidance of Double Taxation agreement on December 9^th. Negotiations had been underway since the inception of the CPEC for Chinese banks to claim tax exemptions on the interest income they would earn by lending to this project. Since this would result in loss of tax revenue, the Pakistani side was unwilling to provide tax breaks on projects other than those related directly with the energy sector. According to sources, consensus has now been achieved and the third protocol of the taxation agreement offers tax exemptions but as per the requirements of the Federal Board of Revenue, these exemptions are limited to investments in the energy sector projects only. Given the very high level of investment that is going into CPEC, this is a significant tax break which could prompt more Chinese banks and businesses to show interest in Pakistan.

Meanwhile, the Pakistan Stock Exchange (PSX) which had been looking to sell a 40% stake to a strategic investor, has found a suitor in the form of a consortium made up of three Chinese stock exchanges. Led by the China Financial Futures Exchange the consortium also includes the Shanghai Stock Exchange and the Shenzen Stock Exchange. The Chinese consortium has submitted a letter of intent to the PSX along with other local and foreign investors. A total of 17 bids have been submitted to the PSX amongst which is another strategic investor in the form of a consortium formed by the Nasdaq and two UK based funds. The PSX is expected to reach its final decision regarding the sale by the end of this month. The evaluation of these offers is expected to be based on several interlinked factors to determine which stakeholder could bring the most to PSX in terms of raising the PSX share value and introducing new technology. Investment by a strategic investor in the PSX could potentially result in a larger investor base and new company listings. However for this to happen the strategic partner must belong to an economy that is positively geared towards Pakistan. Given China’s current level of interest in Pakistan and its long term plans for infrastructural and energy sector development in the country, the choice of a Chinese consortium as a strategic partner seems like a logical one for PSX.

Whatever decision the PSX arrives at, it is quite obvious that Pakistan’s economic health is dependent on a good relationship with China. The economic heavyweight has its fingers in several pies around the world compared to which gains from Pakistan may appear to by small fry at least in the immediate term. But China’s relationship with Pakistan is more than just about economic benefit. Both countries find themselves dealing with a problematic relationship with their other neighbours and it is vested interests rather than that starry-eyed promise of loyalty and friendship which has brought them together. It is only hoped that while Pakistan attempts to derive benefit from China’s economic might, our government will not do so by making regulatory concessions which could cost the country in the long run.

Published in The Express Tribune, December 12^th, 2016.

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