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America's Waning Influence: Beijing to Invest $46 Billion in Energy and Infrastructure for U.S. 'Ally'

Chinese investment in Pakistani infrastructure may be a welcome replacement for American sanction threats and drone attacks 

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This article originally appeared at Zero Hedge

China is looking to succeed where the United States has failed. Beijing — which, as a reminder, has claimed it will not use its regional infrastructure development initiatives as a tool of foreign policy — is now set to facilitate the construction of nearly $50 billion in power plants, roads, and railways in neighboring Pakistan. The proposal, which will give China access to the Indian Ocean via the Gwadar port on the Arabian Sea, is part of President Xi Jinping’s ambitious “Silk Road” Economic Belt, a plan announced last year that aims to connect China with Europe via a series of infrastructure projects. As a reminder, here’s a description via Xinhuanet:

The Silk Road Economic Belt focuses on bringing together China, Central Asia, Russia and Europe (the Baltic); linking China with the Persian Gulf and the Mediterranean Sea through Central Asia and the Indian Ocean. The 21st-Century Maritime Silk Road is designed to go from China's coast to Europe through the South China Sea and the Indian Ocean in one route, and from China's coast through the South China Sea to the South Pacific in the other.

China also hopes the partnership with Pakistan will act as a check on the spread of fundamentalism into its Western Xinjiang region which is predominantly muslim.

Additionally, and perhaps most importantly, President Xi's investment in Pakistan will likely include nearly $2 billion in loans for the construction of Pakistan's portion of the long-delayed Iran-Pakistan natural gas pipeline (the so-called "Peace Pipeline"). Iran's section is complete, but the Pakistani side of the equation has been complicated by Washington which has threatened sanctions against Islamabad should the Pakistani government trade with Tehran. The prospect of an Iranian nuclear deal (as elusive at it seems) and the willingness of Beijing to invest in the country mean the project may finally be completed with China building some 435 miles of pipeline from Nawabshah to Gwadar (where an LNG terminal may be built and incidentally, where the proposed economic corridor from China to the Arabian Sea will dead-end) while Pakistan will construct the remaining 80 miles of pipe to the Iranian border. Here's WSJ:

China will build a pipeline to bring natural gas from Iran to Pakistan to help address Pakistan’s acute energy shortage, under a deal to be signed during the Chinese president’s visit to Islamabad this month, Pakistani officials said.

The arrival of President Xi Jinping is expected to showcase China’s commitment to infrastructure development in ally Pakistan, at a time when few other countries are willing to make major investments in the cash-strapped, terrorism-plagued country.

The pipeline would amount to an early benefit for both Pakistan and Iran from the framework agreement reached earlier this month between Tehran and the U.S. and other world powers to prevent Iran from developing nuclear weapons. The U.S. had previously threatened Pakistan with sanctions if it went ahead with the project.

“We’re building it,” Pakistani Petroleum Minister Shahid Khaqan Abbasitold The Wall Street Journal. “The process has started.”

The pipeline will bring much-needed gas to Pakistan, which suffers from a crippling electricity deficit because of a shortage of fuel for its power-generation plants. Pakistan has been negotiating for months behind the scenes for China to build the Pakistani portion of the pipeline, which will cost up to $2 billion...

Pakistan hasn’t begun construction, however, in light of threatened U.S. sanctions for trading with Iran. Islamabad had sought to work around the sanctions by asking the Chinese to build the pipeline but not yet connect it to the Iranian portion. The prospect of an Iran nuclear agreement, which would ease sanctions in stages once the deal is completed, has given Islamabad further impetus to clear the project...

Islamabad believes the Iranian gas is the cheapest and simplest energy supply option for Pakistan. Pakistan will also start to take liquefied natural gas from Qatar, and it remains in protracted multicountry negotiations over a pipeline that would bring gas from Turkmenistan through Afghanistan to supply Pakistan and India. Washington had long lobbied Pakistan to go for the Turkmenistan pipeline instead of the Iranian one...

Pakistan has had a close strategic alliance with China for decades—aimed mostly against common foe India—but now Beijing is seeking to add an economic dimension to the relationship. Islamabad and Beijing plan an “economic corridor” linking the Pakistani port of Gwadar, which is under Chinese management, to southwestern China with road and rail connections.

Aside from advancing its economic and security interests, the move by China also represents an effort on the part of Beijing to prove it can be successful where Washington has failed. Despite efforts to present an ostensibly united front against terrorism, relations between the US and Pakistan have suffered from mutual mistrust for years, and the new commitment by China may serve to further diminish American influence in Islamabad. Indeed, the $46 billion China is set to invest is 53% more than the US has invested in the country in 13 years and is six times as much as what Washington promised under a recent program which the New York Times notes is generally considered a “dramatic failure.” Here’s more:

China’s president, Xi Jinping, travels to Pakistan on Monday laden with tens of billions of dollars in infrastructure and energy assistance on a scale the United States has never offered in the past decade of a close relationship, a gesture likely to confirm the decline of American influence in that nation.

Mr. Xi, making his first overseas trip this year, and the first by a Chinese leader to Pakistan in nine years, will arrive fortified from the robust reception to the new China-led Asian Infrastructure Investment Bank, and is looking to show that China can make a difference in a friendly, neighboring country troubled by terrorism.

Pakistani officials say that Mr. Xi will be signing accords for $46 billion for the construction of roads, rails and power plants to be built on a commercial basis by Chinese companies over 15 years.

Just as the United States sought to stabilize Pakistan during the war in Afghanistan, so China wants to prevent the spread of militant groups in Pakistan into Xinjiang, the far western region of China with a large Muslim population…

A significant amount of China’s new assistance … will be in areas close to the tribal areas where the militant groups operate...

“The Chinese are stepping in, in a much, much bigger way than the United States ever contemplated,” said Jahangir Tareen, a Pakistani businessman, and the secretary general of the Pakistan Tehreek-e-Insaf party. “The assistance is far, far more than the United States government offered under the United States Agency for International Development.”

Most striking about the visit is the scale of Mr. Xi’s aid announcement compared with the American effort from 2009 to 2012 spearheaded in Congress by John Kerry, then a senator, and pressed in Pakistan by Hillary Rodham Clinton, then secretary of state. The program designated $7.5 billion for development projects over five years.

That effort was a “dramatic failure” because the resources were scattered too thinly, and had no practical or strategic impact, said David S. Sedney, a former senior official at the Pentagon responsible for Pakistan during that period.

The Chinese appear to have learned from the American program, including the notion that the American plan was designed to deliver a strategic result — deterring terrorism — but failed to do so, Mr. Sedney said.

To do better than the United States, the Chinese have come up with “a much larger financial commitment — and it is focused on a specific area, it has a signature infrastructure focus and it is a decades-long commitment,” he said.

As FT reports, the new partnership comes on the heels of the announcement that Pakistan will purchase eight submarines from China, which is now the world’s third largest arms supplier and which, readers are reminded, has been keen to project its military prowess of late between a rescue effort in Yemen and the construction of a 10,000 runway atop reclaimed islands in the South China Sea. 

In a show of deepening military ties, Mr Xi’s visit was preceded by confirmation that the Pakistan navy will buy eight Chinese submarines after failing to strike an agreement with other suppliers. The types of submarines and their expected cost has not been revealed, but analysts say the contract could be worth $4bn-$5bn and would be the largest defence contract for both countries.

While it isn’t yet clear what portion of the investment in Pakistan will come from the AIIB, the China-led infrastructure investment bank which recently staged a major coup by attracting membership bids from US allies despite the protestations of The White House, what is clear from the numbers is that the new bank, by virtue of its singular purpose may be far better at facilitating regional development than its rival. Here’s Bloomberg:

If it can overcome operational and political challenges, the China-led Asian Infrastructure Investment Bank may reduce infrastructure bottlenecks and boost developing Asia’s potential output by more than 1 percentage point. The AIIB is poised to emerge as Asia’s biggest investment-focused multinational development bank…

World Bank data show a big gap between infrastructure in Asia and developed countries. Compared with India’s 2.3 telephone lines per 100 people, the U.S. has 42.2. While Indonesia has 1.3 fixed broadband Internet subscribers per 100 people, the U.S. has 29.3. Least-developed Asian countries’ disparities are even more stark…

The AIIB’s expected paid-in capital of $20 billion would give it about the same lending capacity as the ADB. The ADB committed about 60 percent of its $21 billion in new loans in 2013 to infrastructure projects, or about $12.6 billion. Given the AIIB’s sole focus on infrastructure, its capacity to make loans toward building Asia’s bridges and power plants might be 60 percent to 70 percent greater than its Manila-based rival’s.

Of course the encumbents will be resistant to change as it represents a threat to the way things have been for decades, which is why the following comments from the head of the ADB come as no surprise. 

Via FT: 

“I’m not trying to belittle the initiative,” he said. “I think it is understandable.”

But the ADB, he said, had almost $100bn in loans outstanding in Asia, twice the initial capital proposed for the AIIB. The ADB’s total authorised capital stands at more than $150bn.

“It’s a huge amount of money. I’m not boasting that we are bigger. But we have a history and a certain lending capacity and expertise and persified staff. We can continue to play a role,” he said.

“I don’t think there will be major change to the world of development finance [because of the creation of the AIIB], although there can be interpretations as to the symbolic meaning of this.”

*  *  *

Even as Beijing seeks to play down the degree to which its regional development initiatives are indicative of a larger plan to supplant the post WWII economic order, the evidence is mounting that in fact, China does indeed intend for the AIIB and Silk Road Belt to serve as instruments of foreign policy and, despite explicit denials, recent reports suggesting Beijing will push for the yuan to have an outsized role in deals financed through China-led initiatives seem to indicate that China no doubt understands how powerful of a tool the new funds could be in terms of helping to establish the yuan as a viable alternative to the dollar which, as a result of the crumbling petrodollar system and a shift towards institutions like the AIIB, may see its reserve currency status slip in the coming years. We’ll close with the following from China Daily:

In a rare case of disagreement with the US, the United Kingdom, France, Germany, Italy, Luxembourg and Switzerland all applied to join the AIIB. This symbolic development marks the rise of emerging economies, with China as their representative, and is a prelude to the restructuring of the global financial system.

The AIIB and the Belt and Road Initiative could be the platform to turn promises into action for the benefit of all members, developing as well developed.

More importantly, the efficiency with which China transformed the Belt and Road Initiative from a proposal into a grand executable plan in about a year shows its determination to make them succeed.

China’s belief and engagement in trade, cooperation and investment for mutual benefit could further facilitate the success of the AIIB and Belt and Road Initiative, while the cost-performance advantages some Chinese industries enjoy and the country’s huge foreign exchange reserves and high savings are factors that constitute a solid foundation for the country’s «go global» strategy for its enterprises to increase overseas operations.

To sum up the above with one cartoon:

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