Area Development and Policy

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The China–Pakistan Economic Corridor (CPEC):

challenges and prospects

Shehryar Khan & Guijian Liu

To cite this article: Shehryar Khan & Guijian Liu (2018): The China–Pakistan Economic
Corridor (CPEC): challenges and prospects, Area Development and Policy, DOI:
10.1080/23792949.2018.1534549
To link to this article: https://doi.org/10.1080/23792949.2018.1534549

Published online: 23 Nov 2018.

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AREA DEVELOPMENT AND POLICY
2018, VOL. 00, NO. 00
https://doi.org/10.1080/23792949.2018.1534549

COMMENTARY

The China–Pakistan Economic Corridor (CPEC):

challenges and prospects
a,b,c
Shehryar Khan,a and Guijian Liu

ABSTRACT
The China–Pakistan Economic Corridor (CPEC) is a US$62 billion project designed to resolve
Pakistan’s energy deficit, improve connectivity, and establish economic development zones and
supporting social infrastructure that lay the foundations for subsequent economic growth, grapple
with endemic instabil-ity and exploit Pakistan’s strategic position. Challenges posed by the
geographical environment, terror groups, political instability and the management of debt, along with
geopolitical issues relating espe-cially to relationships with India, are examined and assessed.
ARTICLE HISTORY
Received 2 October 2018; Accepted 3 October 2018
KEYWORDS
economic development, Pakistan, China, international trade, debt, terror groups, geopolitics,
economic development, foreign direct investment, infrastructural development, energy security

摘要
中巴经济走廊：挑战与前景. Area Development and Policy. 中巴经济走廊是一项价值 620 亿美元的工程，
旨在解决巴基斯坦的能源短缺问题，改善连通性并建立经济开 区和为后续经济增长奠定基础的社会基础
施，应对普遍存在的不稳定问题和发挥巴基斯坦的战略 。本研究探讨了地理环境、恐怖组织、政治不稳定
性和债务管理 来的挑战以及一些地 政治问题，特别是对有关与印度关系的问题进行了分析和评价。

关键词
经济发展, 巴基斯坦, 中国, 国际贸易, 债务, 恐怖组织, 地 政治学, 外国直接投资, 基础 施发展, 能源安全

RESUMEN
El corredor económico chino-pakistaní: desafíos y perspectivas. Area Development and Policy. El corredor
económico chino-pakistaní es un proyecto de 62.000 millones de dólares estadounidenses cuyo objetivo es
solucionar el déficit energético de Pakistán, mejorar la conectividad y establecer zonas de desarrollo
económico con la infraestructura social correspondiente, sentar las bases para el posterior crecimiento
económico, abordar la inestabilidad endémica y aprovechar la posición estratégica de Pakistán. Aquí se

(Corresponding author) lgj@ustc.edu.cn

a
School of Public Affairs, University of Science and Technology China, Hefei, Anhui, China.
b
CAS Key Laboratory of Crust-Mantle Materials and the Environment, School of Earth and Space Sciences, University of
Science and Technology of China, Hefei, Anhui, China.
c
State Key Laboratory of Loess and Quaternary Geology, Institute of the Earth Environment, The Chinese Academy of
Sciences, Xi’an, Shaanxi, China.

© 2018 Regional Studies Association

2 Shehryar Khan and Guijian Liu

analizan y evalúan los retos planteados por el entorno geográfico, los grupos terroristas, la
inestabilidad política, la gestión de la deuda, además de las cuestiones geopolíticas, relacionadas
especialmente con las relaciones con India.
PALABRAS CLAVE
desarrollo económico, Pakistán, China, comercio internacional, deuda, grupos terroristas,
geopolítica, inversión extranjera directa, desarrollo infraestructural, seguridad energética

АННОТАЦИЯ
Китайско-пакистанский экономический коридор (CPEC): вызовы и перспективы. Area
Development and Policy. Китайско-пакистанский экономический коридор (CPEC) – это проект
стоимостью 62 миллиарда долларов США, предназначенный для решения проблемы дефицита
энергии в Пакистане, улучшения транспортной доступности, создания зон экономического
развития, поддержки социальной инфраструктуры, закладывающий основы для последующего
экономического роста, преодоления эндемической нестабильности и использования
стратегического положения Пакистана. Рассматриваются и оцениваются вызовы, создаваемые
географической средой, террористическими группировками, политической нестабильностью,
долговым бременем, а также геополитические вопросы, касающиеся, в частности, отношений с
Индией.
КЛЮЧЕВЫЕ СЛОВА
экономическое развитие, Пакистан Китай, международная торговля, задолженность,
террористические группы, геополитика прямые иностранные инвестиции, инфраструктурное
развитие, энергетическая безопасность

Announced in July 2015, and formally established in April 2015 on the occasion of President Xi
Jinping’s visit to Pakistan, the China–Pakistan Economic Corridor (CPEC) is a project that
envisages Chinese investments in Pakistan to the tune of US$46 billion (increased in 2017 to
US$62 billion) in the period up to 2030. The CPEC envisages the provision of preferential loans
for investments in road, rail, oil, gas and information transport infrastruc-tures, energy projects
(mainly under a construct–own–operate mode) to address Pakistan’s debilitating energy
shortfall and economic development zones including 27 special economic zones, along with
investments in vocational education and social infrastructure (Esteban, 2016). These projects
will generate income and employment directly, in some cases in relatively under-developed
parts of Pakistan. Indeed, Haq and Farooq (2017) estimate that by 2020, the CPEC will
increase social welfare most in resource-rich yet under-developed Baluchistan province (6.4%
compared with 5.2% nationally), and will lead to significant relative improvements in the quality
of life in districts with high levels of poverty and unemployment. At the same time, CPEC
projects are designed to lay the infrastructural foundations for the subsequent attraction of
foreign direct and domestic investment in industry, trade, commerce and tourism, and the
creation of further economic opportunities for wide strata of the population of Pakistan, making
it a more cohesive country.
The overall project was very quick to get off the ground. A plan prepared by Pakistan in
consultation with China envisages three corridors: an eastern, central and western alignment
(Figure 1) with regional connectivity with India, Afghanistan and Iran respectively. At present,
17 Early Harvest Projects costing US$16 billion are underway. As of mid-2017, these projects
had generated an estimated 38,000 jobs, of which 8000 were for Chinese workers (Yousafzai,
2017). Of these projects, 11 are in the energy sector (Jain, 2018). Including coal-, hydro-, solar-
and wind-power projects, they are designed add 10,400 MW

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 The China–Pakistan Economic Corridor (CPEC): challenges and prospects 3

Figure 1. Major China–Pakistan Economic Corridor (CPEC) projects.

Source: Haq (2018).

of electricity to the national grid by the end of 2018, addressing a serious energy shortage,
which is one of the principal factors holding back Pakistan’s economic development. A total of
30% of CPEC projects are in Baluchistan, and include the Quaid e Azam Solar Park, the
Dawood Wind Power Project, the (70% complete) Port Qasim Power Project and the (80%
complete) 1300 MW Sahiwal Coal Power Project. The Harvest Projects also include the 392
km Peshawar–Karachi Motorway, costing US$2.98 billion. The 1899 km west route road
crosses under-developed and isolated areas in Baluchistan and southern Khyber–
Pakhtunkhwa, while the expansion and reconstruction of the first phase of the 1830 km

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4 Shehryar Khan and Guijian Liu

Karachi–Lahore–Peshawar Mainline Railway (ML-1), financed by a concessional

Chinese loan, has been approved (Figure 1).
Once completed, the corridor will provide China with land routes (initially along the upgraded and
reconstructed 1300 km Karakoram Highway crossing difficult mountainous terrain from Kashgar to
Abbottabad via the Khunjerab Pass border crossing) from Kashgar in Xin Jiang province to the
Arabian Sea via the port of Gwadar in Baluchistan in the south-west of Pakistan. The CPEC is one of
six overland economic corridors so far identified in China’s Belt and Road Initiative (BRI) (Liu &
Dunford, 2016). Launched by Chinese President Xi in 2013, the BRI is designed to improve
connectivity in Europe, Asia and Africa. The BRI comprises the overland Silk Road Economic Belt to
the north of Pakistan and a Maritime Silk Road to the south. As a result, Pakistan is ideally
positioned to connect the two, making the CPEC a flagship BRI project (Hussain, 2017a). The CPEC
will also grant Russia and landlocked states of Central Asia easier access to the Indian Ocean
region, making Pakistan a vital transit state. Although India has serious reservations about the
CPEC, it may also eventually help improve Pakistan–India relations by facilitating Indian access to
Central Asia and the Eurasian Economic Union (EAEU).
The CPEC reinforces the economic and commercial dimension of more than five
decades of all-weather friendship between China and Pakistan (Hussain, 2017a) and was
mooted at least as early as a meeting between Chinese President Hu Jintao and
Pakistan’s General Pervez Musharraf in Beijing in 2003 and at a subsequent Treaty of
Friendship, Cooperation and Good-neighbourly Relations signed in 2005 by Chinese
Premier Wen Jiabao and Pakistan Prime Minister Shaukat Aziz, itself designed to
strengthen and upgrade the long-term strategic and security partnership between the two
countries (Raza, Mohiuddin, Zaidi, & Osama, 2018). The treaty comprised 22 agreements
covering economics, trade, politics and defence, amongst other issues, of which the most
important was the China–Pakistan Free Trade Agreement (CPFTA) removing tariffs on
China–Pakistan trade. A free trade agree-ment (FTA) in services was added in 2009.
Pakistan–China trade relationships have always been positive and mutually beneficial. In 2017,
bilateral trade stood at US$19.709 billion, up from just US$2.113 billion in 2003. Pakistan has
accounted for a small but increasing share of Chinese exports (from 0.4% in 2003 to 0.8% in 2017),
while China has accounted for an increasing share of Pakistan’s exports (2.2% in 2003 to 10.7% in
2012 and 6.8% in 2017). Pakistan has had a consistent trade deficit with China, increasing from
US$1.597 billion in 2003 to US$6.771 billion in 2011 and sharply to US$16.772 in 2017 as capital
formation accelerated (WITS, 2018). In 2016, 61% of Pakistan exports to China were of cotton, 14%
of rice, 5% of ores, slag and ash, 3% of fish, and 17% of other products. Value-added items such as
garments are largely missing. Amongst Chinese exports, 8% were of iron and steel, 5% of organic
chemicals, 24% of electrical equipment, 21% of machinery and nuclear reactors, 4% of manmade
filaments, 4% of iron and steel articles, and 34% of other imported products (Raza el al, 2018). To
date, Pakistan has not managed to take full advantage of the concessions made by China under the
CPFTA using only 3.3% of the total tariff lines (Hussain, 2017a). Hence, the importance of the CPEC
as it is designed provides conditions for the offshoring of labour-intensive industries to Pakistan, a
development of intermediate goods industries, and the devel-opment of stronger and ultimately more
balanced trade relationships.
Although the project was only recently set in motion, aspects of the CPEC actually date
back to 1998, when China started to take interest in Gwadar Port. Chinese construction of the
port started in 2002 and was completed in 2006, but operational use was delayed for a number
of reasons, including the fall of General Musharraf. In 2013, a new phase in the development of
the port was opened with the cancellation of a contract with Singapore to operate the port, and
the signing in May 2013 of several agreements and memoranda of understanding by former
President Asif Ali Zardari and Chinese Premier Li Keqiang that initiated the CPEC
(Ramachandran, 2015). Just 400 km from the Strait of Hormuz and the Persian Gulf, the port

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 The China–Pakistan Economic Corridor (CPEC): challenges and prospects 5

of Gwadar may play a major role in ensuring China’s energy security, providing a
much shorter (though difficult) route to mainland China than the current 12,900 km
route via the Strait of Malacca and the South China Sea to China’s eastern seaboard
(Hali, Shukui, & Iqbal, 2015; Hussain & Hussain, 2017).
For these reasons it is not surprising that the CPEC is considered a project that
potentially has extraordinary implications for peace and development and is a
potential ‘game changer’ for Pakistan’s economic development, security and regional
neighbourhood. Nevertheless, the CPEC faces many challenges and its ultimate
impact depends on the capacity of the actors involved to tackle them effectively.
The first set of challenges relate to environmental issues and are of two kinds. The first is
that a major problem for increased connectivity, especially with China, which to date is confined
to the Karakoram Highway, is the physical topography and climate of the border zone: any
transport infrastructures must pass through difficult mountain terrain, rising to more than 5000
metres above sea level and subject to landslides and extreme climatic events, as well as
earthquakes. Technical solutions exist but are expensive involving costly road and rail
tunnelling and for pipeline insulation and expensive pumping facilities. The second set relates
to environmental concerns. Air quality and water consumption are the major challenges,
although energy, industrial and urban development, and increased traffic also result in soil and
noise pollution and have adverse effects on biodiversity. All these problems require the
adoption of control and mitigation measures to protect the environment and the health and
quality of life of the area’s inhabitants (Khwaja, Saeed, & Urooj, 2018).
The second challenge is a set of security concerns that ultimately date back to the anti-
Soviet jihad in Afghanistan. At present, these concerns derive from the existence of an arc of
often externally supported extremist groups stretching from Xin Jiang via the lawless federally
admi-nistered tribal territories along the border with Afghanistan to Gwadar and involve groups
such as the East Turkestan Islamic Movement (ETIM), Tehrik-i-Taliban Pakistan (TTP),
Lashkar-e-Jhangvi (LeJ) and the separatist Baluchistan Liberation Army (Abid & Ashfaq, 2015).
These groups are a source of instability, of terrorist attacks in China in the case of the ETIM,
and attacks on personnel and infrastructures in Pakistan. The Pakistan government has tried to
crack down militarily on these groups, has created a 10,000-strong Special Security Division to
protect development projects and has closed some Wahhabi–Salafist madrasas. A solution to
these problems will, however, also involve ending foreign interference, socioeconomic
development and employment, especially in under-developed areas and education.
The instability of Pakistan’s political system and domestic political rivalries with the
central government and the provinces disputing the distribution of Chinese investments
are further challenges. Since independence in 1947, only one prime minister has
completed his/her parliamentary term, and none has served for five years. In the same 70
years, the military has ruled the country for 35 years after successful military coups in
1958, 1977 and 1999. More importantly, the power of the military has recently increased,
not least due to a need to improve security, and the military has considerable influence in
the country’s political system (Wolf, 2016), with possibly negative implications for the
responsiveness of the political class to popular concerns. In order to ensure popular
legitimacy, the involvement of the military in CPEC projects should be kept to a minimum.
Another major political concern were indications that in the early stage priority was being
given to the eastern route and to Punjab. Punjab is the richest state and the political stronghold
of the ruling (until the 2018 elections) centre-right Pakistan Muslim League, and its prioritization
would exacerbate regional inequalities. This choice was criticized by the Pakistan People’s
Party and Pakistan Tehrik-i-Insaf (which was the largest after the 2018 election), which ruled
Sindh and Khyber Pakhtunkhwa respectively. At the same time, there is the problem of the
fourth province of Baluchistan, which is the largest and least densely

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6 Shehryar Khan and Guijian Liu

populated and where the Bloch inhabitants are ill-prepared for the types of jobs that will be
created and fear an influx of workers that will make them a minority (Shahid, 2016). To address
some of these concerns, an All Parties Conference in May 2015 agreed to develop the west
route from Khyber Pakhtunkhwa to Baluchistan first and involve all stakeholders (Esteban,
2016; Ramay, 2016), while the Minister for Inter-Provincial Coordination, Riaz Hussain Pirzada,
insisted that the CPEC would pass through the entire country and should not be made
controversial and that all provinces would benefit. What is clear is that a major renewal of the
education sector is required to prepare people for the types of jobs that will be created in the
years ahead and that regional stability and equity are vital.
The creation of subsequent economic growth is also a vital challenge. The CPEC is funded
in part by preferential and commercial loans, which in the end will have to be repaid. Generally
speaking, the transport infrastructures are largely financed by soft loans at rates of 2.0–2.4%
and the power installations involve commercial loans at 6–7%. To ensure the viability of the
CPEC projects, the Pakistan government has made agreements on electricity tariffs and cash
and tax concessions for economic development zones. Once operational power facilities will
generate repatriated profits. A concern is that if sufficient economic activity is not generated,
Pakistan may find it difficult to repay outstanding debt and that the balance of payments
position may deteriorate. At present, government debt and Pakistan’s net interna-tional
investment position stand at 67.2% and 34.9% of gross domestic product (GDP), while
Pakistan is running a growing trade deficit (Table 1). In the investment stage, increased imports
of machinery, equipment and services are offset by increased foreign investment, but after that
stage, Pakistan will need to generate increased export revenue. In 2017, the Pakistan
government’s chief economist stated that the repayments would peak at US$5 billion in 2022
and insisted that there will be no balance-of-payments difficulties as transit fees alone would
amount to US$6–8 billion per year. This estimate depends, however, on whether trade grows
and China ships oil and other goods for its western regions through Gwadar (Reuters, 2017).
On the international front, the CPEC faces a number of challenges. One is the need for a
settlement of the conflict in Afghanistan, where Russia, China and Pakistan are seeking a
solution involving negotiation with the Afghan Taliban. Another is Indian hostility. On a visit to
Beijing in 2015, Indian Prime Minister Narendra Modi described the project as unaccep-table.
India’s concerns relate in part to the fact that a number of transport projects cross Gilgit–
Baltistan, which is a part of the disputed territory of the former princely state of Jammu and
Kashmir. This dispute affects the CPEC and other projects in Pakistan (Sabir, Torre, & Magsi,
2017). India’s second concern relates to the Chinese role in the port of Gwadar. China already
plays a role in a number of ports with immediate access to the Indian Ocean, including
Hambantota in Sri Lanka, Sittwe in Myanmar and Chittagong in Bangladesh. India is concerned
about their use as naval ports, in part in the light of the new strategy of the People’s Liberation
Army Navy of combining ‘offshore waters defense’ with ‘open seas

Table 1. Pakistan elaborated from the International Monetary Fund’s (IMF) international
financial statistics
2012 2013 2014 2015 2016 2017

Current account balance/GDP (%) –2.08 –1.08 –1.28 –1.00 –1.75 –4.09
General government gross debt/GDP (%) 63.24 63.86 63.47 63.32 67.57 67.17
Net international investment position/GDP (%) 28.42 30.71 31.24 28.35 32.30 34.85
Total reserves excluding gold (US$ million) 10,242 5156 11,807 17,830 19,650 15,765
Note: GDP, gross domestic product.

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 The China–Pakistan Economic Corridor (CPEC): challenges and prospects 7

protection’ (Hali et al., 2015). India had, however, itself chosen in October 2014 to
develop Chabahar port in Iran, which is also located in an area with Baloch people,
while cooperative ventures involving the two ports are under way.
The CPEC genuinely is for Pakistan and its neighbourhood a potential game changer. The
project will without doubt finally address Pakistan’s energy deficit and radically improve con-nectivity.
If these conditions lay the foundations for increased trade and transit revenues, and if Pakistan
attracts investment and tourism and embarks on export-led growth, it will manage to repay its debts.
At the same time, common prosperity will help stabilize Central Asia. If on the way it encounters
difficulties, it may need to renegotiate aspects of the deals with China. The obstacles along the way
are, however, many. To succeed fully, it requires peace and stability, which involves addressing
issues of education, employment, welfare and equity, which are connected to contemporary
instability, a reduction in the destabilization that derives from external (usually Western) interference
in domestic affairs, a solution to neighbourhood problems including a settlement of the conflict in
Afghanistan and, ideally, an improvement in relation-ships with India, a shared vision of the future
and greater accountability (Khwaja et al., 2018).

ACKNOWLEDGEMENTS

The authors thank Michael Dunford for his detailed comments on an earlier draft of the
paper as well as for help with the provision of material and drafting of this manuscript.

DISCLOSURE STATEMENT

No potential conflict of interest was reported by the authors.

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