Economic linkage with China
By Dr Kamal Monnoo

It is all very well to talk about visionary leadership, but to make it practically happen requires fresh thinking, new blood, and economic and management expertise. Also, it entails the capacity to think big, long-term and the courage to stand up and compete with the best in the world. The new Chinese Prime Minister, Mr Li Keqiang’s first overseas trip was to India and from there he came to Pakistan to reassure the interim government and the one in waiting of a friendship between the two countries that is (in cliché terms) “higher than the mountains and deeper than the oceans.” Ironically, this much-touted iron-clad bonding between Pakistan and China does not reflect well when one dissects the quality of Chinese discussions that took place in New Delhi as against those that took place in Islamabad. Now, one should not blame China for not engaging Pakistan in the same way they are looking to economic partner India in the coming years, but instead realise that the shortcoming in fact lies at home. Not only has our leadership failed to manage the Pak economy in a way that sparks the interest of foreign investors, but (unlike the Indian leadership) in its discussions with the Chinese leadership it also failed to display any strategic vision by identifying areas that carry the real potential of cementing a tangible long-term economic linkage with an ‘economy’ that is tipped to be the world’s largest in not too distant a future. In order to properly understand and appreciate what went lacking at our end, we need to actually look at some (four in the context of this article) of the key cooperation areas identified by the Indians and discussed at length during the China-India dialogue. First, an increase in currency cooperation between China and India. From the beginning of the 21st century, fiscal and financial cooperation in Asia has been expanding rapidly and the Chiang Mai Initiative Multilateralisation (CMIM) is one of the positive outcomes of such enhanced cooperation. However, the CMIM has yet to be put to real test and the countries in East Asia need to make it more operable by enhancing its capacity of economic surveillance, crisis rescue and prevention. Both sides agreed that since between them they represent the two largest emerging economies of the world, they will jointly cooperate and help Asian countries (especially the CMIM and the South Asian nations) in their reform and development endeavours and work together to safeguard financial stability in this region. This cooperation will be structured in such a way that it leads to a broader mechanism of currency cooperation in the future.Second, both countries will support each others’ infrastructure development through joint channels of financing. China in the next decade is focusing on consumption; whereas, India, on the other hand, plans to concentrate on investment and use infrastructure development as the principal means to spur its economic growth. It is experiencing industrialisation and urbanisation, and is short of capital, technology and expertise. Thus, China will help India overcome its deficiencies in all these spheres. Further, in the near future India’s bilateral trade with China is set to cross the $100 billion mark, but the trade surplus (at least in the short term) is likely to remain heavily tilted in China’s favour - the figure for India’s annual trade deficit with China is being estimated at around $40 billion by 2015. However, this was viewed as an opportunity by asking the Chinese to leave this surplus in the Indian economy, instead of taking it out. The new arrangement being looked at is designed to work to mutual advantage. The Chinese will invest in India in Renminbi, which for them will yield a higher monetary return (as against keeping it in the USD) and provide them with the desired flexibility of keeping this export surplus away from dollar denomination funds or securities. For the Indians, it will provide them with the much needed regular annual finance (and, that too, on a recurring basis) to meet their colossal and fast growing appetite for investment in their national infrastructure development. Also, once this deal is agreed upon, the bilateral trade between the two countries can take place in mutual currencies and without the additional cost of involving a foreign currency.Third, the two countries are set to sign a landmark agreement where they will help each other in improving their respective capital markets. The Chinese believe that India has done a lot to reform its financial industry and they can learn and benefit from India’s experience. The joint collaboration calls for direct financing to support each others’ real economy, improve the use of capital in both markets and reduce systemic risks in financial markets, opening and/or improving cross-border financial transactions and clearance mechanisms, increasing financial regulatory cooperation and enhancing connectivity between their capital markets. If this can be made possible, then in the coming years the economic interests of both nations will get so intertwined that they will have no option but to be ‘natural’ allies. Fourth, they want to expand the use of their local currencies when dealing with each other. India is keen to follow and partner China in its quest for currency swaps (Chinese currency swap arrangements have already crossed the Yuan one trillion mark and growing at a fast pace) and to complement the Chinese vision, rather than competing against it. Both sides are working out arrangements to significantly increase bilateral currency swaps and in general come to an arrangement to settle most trade with local currencies and to encourage respective financial institutions to provide preference to local currency settlements. Once this happens and if we in the meanwhile fail to create any meaningful economic linkages of our own with China, then I believe we will need to re-measure the depth of our oceans and the heights of our mountains.Point being, that for us to successfully compete in carving our independent economic relationship with China and to achieve a sustainable level of real economic interdependence between our two countries, the endeavour will require some professional doing. It remains to be seen whether third time around the PML-N government will show the seriousness and maturity to assemble a team that can devise and deliver on a strategy to truly connect Pakistan with China in particular and the mainstream global economy in general, or, will it be the case of yet again presenting the old wine in a new bottle.

The writer is an entrepreneur and economic analyst.

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