Wooing Chinese private sector

BR Research December 27, 2018

The PTI is in an unenviable position. Of the many things the ruling party has to do to fix the country’s external imbalances is to increase the inflow of FDI and reverse the trends in exports. To kill two birds with a stone, therefore, the government is trying to woo Chinese private sector players to enter into joint ventures (JV) with the private sector in Pakistan and then export the same goods to China. The move seems like a long shot, but desperate time calls for desperate measures.

Government sources, some of whom attended the recent JCC said on the condition of anonymity that Islamabad has requested Beijing to encourage China’s private sector to enter into JVs with Pakistani businesses. That’s as if a friendly country asking PM Imran Khan to ask the likes of Mian Mansha to invest in that country. Good luck with that!

Labour costs in China are rising; which is why Chinese private sector is looking for options to shift its production capacity to countries where labour is cheap. Pakistan is a contender for that business, but surely not the most secure one nor the one with top labour (and other factor) productivity. If it were to woo Chinese private sector alone, they may not necessarily make Pakistan their manufacturing hub.

But China’s case is different, where suasion by the now ever more powerful President Xi can set the ball in motion, provided he wants to. And considering that PM Khan has been able to get some dollars both from the UAE and the Saudi Arabia, it should not be a surprise if Khan has been able to convince Xi to encourage Chinese private sector to look at Pakistan.

This is one of the reasons why Planning Minister Khusro Bakhtiar was asked to stay back to meet business associations & chambers, as Beijing has, sources say, agreed to facilitate business to business interactions between the two sides. Besides, even before these talks of JVs surfaced, Chinese private sector had been exploring opportunities in Pakistan in sectors far and wide from bio tech and coconut farming. (Read: BR Research’s Reading the pulse of Chinese FDI in Pakistan, Feb 22, 2017).

The real difficulty is in market access that Pakistan is demanding, so the goods produced by (Sino-Pak) JV companies are exported to China. Because, for that, Pakistan will have to convince China to revise the FTA, which China is not too keen on?

China gave a better trade deal to Asean countries because it is a bigger trading bloc for China. Giving Pakistan the same tariff regime may irk the Asean and given the importance of that bloc, China may not want to do so. Similarly, if China gave a better deal to Bangladesh, it was partly because Bangladesh is in the least developing country category, and partly because China wants to counter India’s weight in Bangladesh.

Ergo the desired revision of FTA doesn’t seem too likely; may be a small token win but not a wholesome revision. Some industry sources expect China to announce the doubling of imports (in dollar terms) from Pakistan in certain HS codes. But unless there is a corresponding increase in productive capacity here at home, it may only redirect exports from any other country – say the EU – to China.

Redirection may also affect business relations and reliability between Pakistani exporters and the European or other importers from whom the goods may be diverted to China. Increasing the capacity on the other hand without an FDI for a JV, in such high interest and weak currency era will be further inflating the import bill.

But there is a silver lining, and the signing of JV does not necessarily depend on the successful revision of Pak-China FTA. There are two main reasons why Chinese private sector is keen to look for opportunities in manufacturing sector. Labour costs are rising in China whereas consumer demand is increasing as the size and income of her middle-class grows.

Second, if America continues with its tariffs war against China, the Chinese private sector will have to look for other countries to make its manufacturing base and try bypassing American tariffs on Chinese goods. Tariff wall or not, the US has been wanting to diversify the source of its imports in any case, which bodes well for countries like Pakistan and Bangladesh.

This, however, doesn’t mean that Chinese private sector will simply be swarming to Pakistan in its hunt for cheap labour costs. Labour productivity, cost of utilities, taxation, safety and security, access to markets and raw material, ease of doing business and so many other factors come into play when a business decides to choose a country as a manufacturing base.

For China, Pakistan isn’t the only option – Bangladesh, Laos, Cambodia, Ethiopia are also contenders. Since President Xi cannot be expected to force Chinese private sector to enter into a JV with Pakistani companies – he can only nudge to consider. Pakistan will have to up its game to beat other contending countries. Hence, the planned formation of a CPEC unit at the Board of Investment and likely benefits for potential Chinese investments to be announced in the upcoming mini-budget and then later in budget FY20. As is in a dance club, the most exciting wooer wins!

 

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