Pakistan learns the downside of taking infrastructure money from China

Key Points
  • China has reportedly halted funding for three road projects that are part of the China-Pakistan Economic Corridor, a centerpiece of the so-called Belt and Road initiative
  • The sudden decision reveals how unilateral Chinese decision-making is on Belt and Road investments, according to analysts
Pakistan learns the downside of taking infrastructure money from China

China giveth, and China taketh away.

Across Asia, the world's second-largest economy has financed infrastructure projects as part of its massive, so-called Belt and Road program. But it's entirely up to Beijing to decide which countries get funding and when — and Pakistan offers a cautionary tale.

Pakistan is home to one of China's central infrastructure schemes: a near $60 billion collection of land and sea projects known as the China-Pakistan Economic Corridor (CPEC). But Chinese President Xi Jinping's administration said it would halt funding for three major roads that are part of the corridor, Pakistani newspaper Dawn reported last week, citing an Islamabad official. Beijing will resume funding after it releases "new guidelines," the newspaper said.

China's foreign ministry and the CPEC secretariat have yet to respond to CNBC's request for comment. If true, the news is proof of China's unilateral management style, analysts said.

"What Beijing giveth, Beijing can also taketh away," Ian Bremmer, president and founder of political consultancy Eurasia Group, wrote in a recent note. Unlike the Asian Infrastructure Investment Bank, another China-led program, Belt and Road projects "aren't transparent or consensus driven," he said.

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"The nature of Chinese economic decision-making has the potential to cause significant downside risks for those countries that become most dependent on the Belt Road initiative," he said. Nations that suddenly fall out of political favor with Beijing, for whatever reason, could subsequently suffer weighty economic consequences.

The three roads — whose total projected cost comes in at nearly $1 billion — link several Pakistani towns.

Turning off the money for the project is "China's way of conveying a diplomatic yet strong message to the Pakistanis: We will pay, but only on our terms," the European Foundation for South Asian Studies, an Amsterdam-based think tank, said in a note, describing the situation as "a temporary punitive step to affirm control."

Why cut off the money?

Security problems and internal divisions among Pakistani politicians may have caused concern in Beijing.

"Pakistani ministries charged with carrying out the projects have incurred delays because of infighting ... Concerns that the project bypasses Pakistan's poorer regions and will mainly benefit the financially-strong province of Punjab has made politicians argue," the think tank said.

As a result, Beijing may want to see Pakistan's army take the lead role on infrastructure projects, it continued: "A closer involvement of the military on political issues would have desirable impacts for China as the Chinese consider the Pakistan army as the epicenter of power in Pakistan and view its involvement with this project as a guarantee of its success."

A truck arrives at a site where workers gather materials for the construction of the M8 motorway on the outskirts of Gwadar, Balochistan, Pakistan, on Wednesday, Aug. 3, 2016. Gwadar is the cornerstone of Chinese President Xi Jinping's Belt and Road project to rebuild the ancient Silk Road
Asim Hafeez/Bloomberg/Getty Images

Because the corridor crosses through disputed territories, military leadership would also alleviate China's safety worries, the research group continued.

The corridor traverses Gilgit Baltistan — a region under Pakistani administration but claimed by India — and links China's violence-prone Xinjiang state with Pakistan's insurgency-torn Balochistan province, where a Chinese workers' shelter was attacked in October by unidentified men.

Separatist rebels in Balochistan, home to a deep-sea port that's a centerpiece of China's efforts in Pakistan, are opposed to the entire operation and have frequently attacked energy and infrastructure projects in recent years.

General economic weakness and entrenched political problems in Pakistan may also be concerns for Xi's administration.

"It's also possible that China's rethinking its investment given Pakistan's overall poor economic trajectory and a lack of change in policy direction from the Pakistani government to make Beijing feel like it's going to turn around," Bremmer said.