But critics claim that China is issuing loans with opaque terms that do not abide by international lending standards. According to the Wall Street Journal, one concession from Pakistan promises Chinese power plants annual returns of up to 34% for 30 years. Worse, $35 billion of the CPEC is allocated for energy projects, which may receive state-guaranteed revenues at a ruinously high rate. Given that Pakistan already owes China more than twice what it does the IMF through June 2022, the feasibility of its debt repayment is alarming.
China is often accused of laying “debt traps” for countries like Pakistan, although economists dispute that China is intentionally using debt to extract concessions from poor countries. Nonetheless, when Sri Lanka failed to repay the Chinese loans it obtained to construct the Hambantota Port in 2017, it was forced to hand over 85% of equity in the port and lease 15,000 acres of land to China Merchant, a state-owned company, for 99 years. Although the agreement forbids military activity in the port, China nevertheless reportedly attempted to use its foothold for intelligence sharing. Nihal Rodrigo, a former Sri Lankan ambassador to China, told the New York Times that Chinese officials had insisted part of the deal was that, “We expect you to let us know who is coming and stopping here.”
An alternative route for trains, trade, and tanks
China’s investment in Pakistan has strategic considerations, too. It is deepening ties with Pakistan as its nervous neighbors shore up defense capabilities: For the year 2020-2021, India has allotted $65.86 billion to its defense budget (China’s stated budget is $178.6 billion), and the two Asian powers have this year intensified their long-running — sometimes violent — border dispute. After Alex Azar, the U.S. Health Secretary, visited Taiwan on August 10, Taipei secured an $8 billion F-16 fighter jet sale from the U.S. — its largest arms package since 1992. Japan’s defense spending hit a record high $48.5 billion for the fiscal year 2020. Australia, meanwhile, has been feuding with China over the national security law in Hong Kong, China’s retaliatory 80% tariff on barley imports, and recently the exit ban of two Australian journalists. In July, Canberra announced a new defense strategy that would deter countries that “pursue their strategic interests through a combination of coercive activities.” There is little doubt that China is its target.
Pakistan provides China with an alternative route for trains, trade, and tanks from the Chinese heartland to the Indian Ocean, which allows it to avoid the East and South China seas, and from the Strait of Malacca, through which the majority of China’s oil imports pass. Pakistan already granted a 43-year lease to China on its Gwadar Port, set to last until 2059. Satellite images of extensive security compounds there have caused speculation that China is on a path to convert the port into a naval base. Using Pakistani ports as springboards, China can bypass the pesky neighbors on its east coast and in Southeast Asia, and directly access the Persian Gulf and Gulf of Aden — vital waterways for maritime trade as well as naval operations.