Financing and Financial Sector Integration Under CPEC

Impact on the Banking Sector

US$45bn expected to be financed mainly from Chinese Banks. Deposit base of local banks US$90bn. Loans outstanding US$46bn Loans by local banks to CPEC likely to be US$8-9bn. CPEC spread over 15-year can result in direct additional 2-3% per year loan growth of the banking system. Indirect impact can be over and above this due to increased economic activity. Equity portion will be 20-25%, which is US$9bn. Local portion of this likely US$2bn, which may be financed by local banks.

Large banks including Habib Bank (HBL) and United Bank (HBL) are likely to benefit from CPEC. HBL has unique agreement with Industrial and Commercial Bank of China (ICBC) and has first right of refusal on all financing provided by ICBC. HBL also plans to open branches in China. ICBC also signed MoU with UBL which will allow it to use UBL’s expertise on Pakistan banks.

Impact on Cement Sector

CPEC involves US$10bn in infrastructure projects, of which up to 15% will be used in Cement as per our channel checks.

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Power projects of US$35bn will also use cement of not more than 1-2% of project cost. Approximately 4% of total project cost of US$45bn is expected to be spent on cement. This translates into Rs190bn, which is 19mn tons for the life of CPEC. Direct impact is estimated at 1.25mn tons per annum (3.5% of total cement local production). Significant indirect impact could be witnessed due to additional infrastructure development.

This can result in additional demand of 500,000-700,000 tons (1.5-2% of total cement production).

Impact on Automobile Sector

Current Roads are 265,000 km and registered motor vehicles are15 million, which includes 2-wheeler, 3-wheeler and4-wheelermotor vehicles and also buses, trucks and others.CPEC and related projects can add 12,000-15,000 km of roads after accounting for additional lanes as per current project details. Assuming current road density of registered motor vehicles, CPEC road projects will result in additional demand for 800,000 autos over next 15 years. Additional annual demand of 55,000-60,000 motor vehicles, bulk of which are expected to be busses and trucks.

Impact on Steel Sector

Steel usage will be extensive in CPEC projects and can run into millions of tons over life of CPEC. Steel will be used in civil works, Rail Tracks, Pipelines (LNG) etc.

Impact on Insurance Sector

Approximately US$30bn of projects will be insured locally and internationally. All local insurance companies likely to benefit and can result in additional insurance premium of Rs2bn annually, which is 4% of total gross premium of insurance industry.

Impact on Refineries Sector

CPEC involves construction of around 850km of roads at cost of US$6.1bn. Large quantities of Bitumen/Asphalt will be required in construction of CPEC road construction/restoration projects. Refinery sector will benefit as these are primary producers of Bitumen/Asphalt. Local production of Bitumen/Asphalt is around 180,000 tons.

Security Challenges

As China’s economic footprint expands in Pakistan through CPEC, so, too, do concerns about security threats to its interests and personnel. While exact numbers are not available, there are an estimated 30,000 Chinese nationals living in Pakistan. The numbers of Chinese visiting Pakistan on short term, including tourist visas (often used to bypass bureaucratic hurdles in obtaining business visas) could be as high as 70,000. “With large numbers of Chinese citizens coming into Pakistan”, said a senior police official in Lahore, “security challenges are becoming graver”.

Environmental Challenges

It has been estimated that hundreds of trucks will pass through the ecologically sensitive Karakorum highway each day. According to another estimate, the number of trucks would reach up to 7,000 a day when CPEC will reach its full swing. The ugly dark fumes released and the dust blown by these trucks along their way to the Gwadar and on their way back to Kashgar city will eventually settle on the glaciers, where they form a black layer. This black layer does two things; firstly it reduces its capacity to reflect sunlight and secondly, it starts absorbing the heat waves thus speeding the process of melting of glaciers and forming lakes.

China is a living example before our eyes, where she has made remarkable progress in economic development in the last few decades, but has also inflicted irreparable damage to its environment.

Foreign Policy Challenges

Sharing border with China, Afghanistan, India and Iran makes Pakistan an important entity for these states. Hence even though the CPEC is a bilateral project but not just Pakistan is a stakeholder in this project but these countries are as well. Second most populous Muslim world and a nuclear power in the region, makes Pakistan’s relevance unavoidable even for those who don’t let any chance go by to isolate Pakistan for their own vested strategic interests i.e. India. However, this also merits attention to certain challenges which continue to plague the socio-political landscape of the country. Some are internally driven while others are externally cultivated.

China-Pakistan Economic Corridor has considerably annoyed both USA and India which fears deadly consequences of the project in the long run. USA diluted and downgraded its ties with Pakistan more due to the China-Pakistan Economic Corridor project offering China importance in the region than the US murder of Osama Bin Laden. The CPEC in fact kills Asia Pivot of USA. Hence Americans are angry with Pakistan, calling for slashing military aid package. A rise in violence may be the most effective way to scare Beijing off the ambitious plan. And Islamabad has repeatedly accused India and other foes of CPEC of fomenting attacks with just that goal in mind. In February 2013, Pakistan awarded operational contract of Gwadar port to China amid American pressure to look for alternatives. This port is a linchpin for China’s dream of OBOR, providing the Maritime Silk Road with a link to the Arabian Sea. The port at the mouth of the Persian Gulf provides China with the shortest route to the oil rich Middle East, Africa, and most of the Western hemisphere. Gwadar will have the estimated capability to handle to 19 million tons of crude oil per year, which will be sent to China after being refined at the port.