How do business chambers view CPEC?

The stock of research on CPEC is finally growing, but is also stoking the stock of fear. A month after the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) released its study on CPEC, the Karachi Chamber of Commerce & Industry (KCCI) is also working on a report on whether Pakistan is ready to surf the CPEC tide or not. Todays piece features a summarised comparison of the two studies.

To recall, the FPCCI study on CPEC was one big backgrounder which aptly contextualised things: it focused on Chinas economy, its transition, the context of OBOR, comparative analyses of Pakistan and Chinas economy across a host of macroeconomic, demographic, governance and ease of doing business criteria. It made a passing reference to some of the sectors that have the potential to grow under CPEC or its spillover, but it fell short of presenting a detailed analysis of any of the potential sectors, and the potential synergies.

Some of the biggest messages from FPCCIs study were: the need for transparency; the need to protect local investors and boost indigenous manufacturing; the need to protect the indigenous peoples and industrialists from hegemony of incoming powerful industrial giants; and the need to provide at least the same incentivesto Pakistanis which have been granted to foreign investors.

Similar sentiments are expressed in KCCIs upcoming study, whose draft is available with BR Research. For instance, the KCCI study raises concerns over the influx of Chinese goods after the Pak-China FTA a view that was shared by the FPCCI in its study on CPEC as well. In addition, the KCCI fears that just as Pakistan suffered from smuggling under Afghan transit trade, she would also be experiencing an influx of goods under Chinas transit trade. Pakistans market would be made a dumping ground for Chinese products, effectively kicking local producers further out of competition, the report said. However, the focus of KCCIs study is one particular sector: textile.

It highlights that China is fast developing Xinjiang into a major textile exporting hub; Xinjiang is Chinas top cotton growing area, producing between 3 to 4 million tons (~60%) of Chinas (approximately) 7 million tonnes of cotton. Rapid industrialization is taking place in the province, and in 2017 China is to spend a huge amount of 183 billion Yuan ($27bn) on its transport infrastructure alone, the KCCI cautions, though it would help if the chambers final report makes proper citations to substantiate these developments, since news from Xinjiang is not exactly common knowledge.

The chamber highlights that a fund of 20 billion Yuan (nearly $3bn) has been created through which their government is investing and encouraging private capital investment in standard garment factory constructions. Factories are to have minimum capacity of 50,000 spindles; as the onus of this textile base is on creation of high tech and high capacity industries, installation of outdated manufactured equipment is strictly prohibited, the draft report said.

It adds that the total investment in Xinjiangs textile sector reached nearly 65 billion Yuan ($9.4bn) in 2016. Exports of textiles and garments from Xinjiang reached 43 billion Yuan ($6.2bn) during the Jan-Oct 2016 period, up 49 percent from the same period last year. Annual cotton spinning capacity has risen to 15 million spindles, up 150 percent year on year (Pakistans total installed capacity is 13.27Mn spindles). Yarn production is 15-20 percent cheaper in the region as compared to other areas in China. As a result of this, the KCCI expects Xinjiang to produce about 500 million garments annually by 2020.

Amid these fears, that China is making Xinjiang a major textile exporting hub, and the fact that Pakistan has high cost of production with lack of government incentives in the sector, the KCCI maintains that it is evident that Pakistan would simply not be able to compete with its Chinese counterparts in competitive markets.

These are indeed developments to be afraid of. But the die has been cast; the winds of change cannot be told to go back; Xinjiang cannot be told to defer its textile plans. If Pakistans private sector has failed to innovate and stay ahead of the curve, then so be it.

Instead of asking for packages from the government, the private sector textile or otherwise should ask the government for long-term consistent policies and also gear up on its own. The private sector should also push the government for reforms, some of which will hurt them as well, instead of asking for incentives such as subsidised loans and then using those monies for real estate speculation.

Moreover, just because Xinjiang is being developed into a textile hub, doesnt mean that all chips are lost. There are also several opportunities as well. It would help to remain cognisant of the fact that China is not one monolithic entity; Chinas private sector is bigger than most people think, and they have competition within. If 10 Chinese companies are setting up in Xinjiang, then at least 2-3 would be looking for opportunities in Pakistan, because if the purpose is to target MENA region, as the KCCI study suggests, then Pakistan is closer to that.

BR Researchs channels check suggest that a host of Chinese firms are seeking JV or M&A opportunities in Pakistan, which could result in substantial spillover of skill and technology, and hopefully work ethic and discipline too.

The FPCCI study on CPEC had also highlighted that frequent visits of Chinese delegations to Pakistan are assessing the possibility of joint ventures in made-up garments, weaving and spinning sectors. Chinese companies are willing to form strategic linkages with their Pakistani counter parts in spinning, grey cloth, polyester, weaving and garment industry.

Anyhow, it is good to note that chambers have finally started producing research with an attempt towards evidence-based policy demands; though there could be a debate on the quality, the context and the direction of the research. Other chambers and associations would hopefully follow suit, where BR Research would like to make two recommendations in so far as research on CPEC is concerned: (a) get down to the specifics, where one can say that KCCIs research on Xinjiangs textile hub is a step in the right direction and (b) focus on the opportunities, where the need is to analyse the corridor from the lens of supply chain and economic geography.