PAK CHINA RELATIONS

PAKISTAN-CHINA ECONOMIC RELATIONS: OPPORTUNITIES AND CHALLANGES

Fazal-ur-Rahman*

Year 2006 marks the completion of 55 years of cordial and smooth relations between Pakistan and China. Over all these years, the two countries have been able to evolve exemplary cooperative relationship at multiple levels, especially in the political, defence and diplomatic arena. However, Pakistan and China have not been able to make substantial progress in their economic relations until recently.

At the dawn of 21st century, both the countries realised the missing economic dimension in their evolving strategic relationship. The two countries acknowledged the fact that in order to sustain a comprehensive cooperative relationship, substantive economic cooperation, matching with the level of political and strategic cooperation, was absolutely necessary. Economic cooperation would not only consolidate the comprehensive bilateral relations but also help in achieving common aspirations for development, peace and stability in the region. In the last few years, the two governments have convened a number of high-level conferences/forums, inaugurated by their respective leadership in Pakistan and China, to promote economic cooperation thereby exhibiting interest, resolve and patronage to the private sector business community of the two countries. Pakistan and China now have created a clear and shared vision of the direction of their economic relations. Clarity in the direction has been achieved due to the frequent exchange of ideas at the high-level consultations between the leadership of the two countries. However, the results of evolving economic cooperation would only be realised after the successful implementation of the agreements reached at various levels on trade and investment.

Recent Developments in Pak-China Economic Relations

Since President Musharraf assumed power in October 1999, the economic dimension in Pakistan-China relations has come to the forefront. As a result of his emphasis on economic cooperation during his China visit in January 2000, economic relations slowly began to show signs of improvement, in terms of trade and investments, in the following years. The Chinese side also positively reciprocated in enhancing economic activity between the two countries.

However, amongst other reasons, one of the reasons for improvement in trade and investment from China is the Chinese government’s persuasion of its state-controlled enterprises to import Pakistani products in order to improve the trade balance and make more project specific investments. The private sectors’ engagement, which would be the main engine for growth in bilateral economic relations in the future, still is at a low level.

Traditionally, throughout in its trade relations with China, Pakistan has had a chronic trade deficit. It is primarily because China is competing in almost all the major sectors of Pakistan’s potential export areas, which ironically happened to be very limited. Secondly, Pakistani business community remained contented with their established export destinations i.e., US and the Western Europe, and hardly made serious efforts either to diversify the export base or to explore other areas and regions for enhancing the volume of their exports. This mental fixation with the Western markets and non-innovative export approach has constantly been undermining country’s export potential.

The then Chinese Prime Minister, Zhu Rongji, during his visit to Pakistan in May 2001, urged the two sides to “boost cooperation in agriculture, infrastructure, information technology and other fields under the principle of reciprocity and mutual benefit for achieving common prosperity.”¹ President Musharraf endorsed his views by suggesting, “this strong relationship needs to be further cemented in the future through economic and commercial bonds.”²

As a result, during the visit of Zhu Rongji, on May 12, Pakistan and China signed six Agreements and one Memorandum of Understanding (MoU). At that time, Chinese financial assistance for agreed projects was estimated to be worth over one billion dollars. This signing of agreements can be termed as the first round of some substantive initiative for expanding economic cooperation. The agreements signed included; Economic and Technical Cooperation, Tourism Cooperation, Lease Agreement on Saindak Copper-Gold Project, Supply of Locomotives to Pakistan Railways, Supply of Passenger Coaches to Pakistan Railways, White Oil Pipeline and MoU between China’s ZTE and Pakistan Telecommunications Co. Ltd. Under the Agreement on Economic and Technical Cooperation, the Chinese Government agreed to provide a grant of 50 million Yuan for the promotion of economic and technical cooperation between the two countries.

Under the Lease Agreement on Saindak Copper-Gold Project, the Metallurgical Construction Corporation of China (MCC) was given a ten-year lease to mine and process copper and gold ores at Saindak. Under another agreement for Supply of locomotives to Pakistan Railways, the Chinese firm, Dongfang Electric Corporation, was to provide 69 locomotives to Pakistan Railways under a supplier’s credit. China National Machinery Import and Export Corporation (CMC) were to supply 175 passenger coaches to the Pakistan Railways under a supplier’s credit.

Agreement on the White Oil Pipeline was signed between the Pak-Arab Pipeline Company and the China Petroleum Engineering Construction Corporation (CPECC), the latter was to supply equipment and materials for the construction of a pipeline to transfer petroleum products from Karachi to Mahmood Kot.

Under the MoU between ZTE and Pakistan Telecommunications Co. Ltd., the Chinese company ZTE will provide financing of US $ 100 million for the manufacture and installation of digitally-switched lines to the PTCL.³

In addition to these agreements, the most important aspect of increasing economic cooperation was that Zhu Rongji reiterated his support for the Gwader deep seaport and the Mekran coastal highway projects. He said, “These projects are very important for the development of Pakistan. We will fully support these projects and provide help in this regard.” Gwader port, overlooking the Straits of Hormuz, is strategically located with open sea-lanes to all directions.

Almost a year later, on March 22, 2002, General Musharraf and the Chinese Vice Premier, Wu Bang Guo, attended the ground-breaking ceremony of the Gwader sea-port. The phase one of Gwader port has been successfully completed in April 2005, and work on the second phase is under progress.

In the following years there has been a regular exchange of high-level visits between the two countries and each visit added new dimensions and areas for economic cooperation. For example, President Musharraf’s visit in November 2003, resulted in signing of a “Joint Declaration on Direction of Bilateral Relations.” It was in fact a road-map determining the direction and scope of overall Pak-China bilateral relations in the future. It clearly laid more emphasis on expanding economic cooperation, while maintaining to continue cooperation in other areas and institutionalising mechanisms for consolidation of all-round relationship.

In December 2004, during Prime Minister, Shaukat Aziz’s visit to China, the two countries signed seven agreements in trade, communication and energy sector and drew up a framework for greater cooperation. These agreements envisaged increase in bilateral trade, further movement on preferential trade agreement, setting up of joint agro-based industries and increased Chinese investment in Pakistan. Pakistan announced Free Market Economy (FME) status for China. Also, China committed to provide $150 million for Chashma nuclear power plant (phase II). It was part of the preferential buyers’ credit of $500 million to be provided by Chinese government for investment through Chinese companies. In the high level official meetings, both sides expressed keen desire for further expanding bilateral cooperation in all directions. One of the core objectives of Prime Minister Shaukat Aziz’s visit was to persuade Chinese side to export capital to Pakistan apart from goods. He was of the opinion that Pakistan has given a new direction to its relations with China by laying greater focus on economic interaction and going for a win-win situation.⁴ China’s investment in Pakistan at present stands at US$4 billion plus, and at least 114 Chinese projects are underway.⁵ The Chinese side also agreed that the Joint Economic Commission should review soon, Pakistan’s proposal to set up a Pakistan-China Joint Investment Company and establishment of a Joint Infrastructure Development Fund for investment in Pakistan. During the visit, Prime Minister Aziz also laid the foundation stone of much awaited Pakistan consulate in Shanghai – the financial capital of China.

The Chinese Prime Minister, Wen Jiabao’s April 2005 visit was considered a landmark visit in which the two sides signed 21 agreements and MoUs on cooperation in economic, defence, energy, infrastructure, social sector, health, education, higher education, housing and other areas. The two sides also signed a “Treaty of Friendship, Cooperation and Good Neighbourly Relations.” Under the agreement on “Early Harvest Programme” (EHP), which has became operational since January 1, 2006, China has brought to zero all tariff on 767 items. This was the first step towards establishing a free trade area between the two countries. It is envisaged that by year 2008, Pakistan and China would be able to implement FTA, covering 90 percent of the commodities. The remaining 10 percent would remain on the sensitive list of commodities.

As a result of the concerted efforts and determination to enhance economic cooperation, when President Musharraf visited Beijing in February 2006, the trade between the two countries had been registering a constant growth; from US$ 1.4 billion in 2001, to US$ 3 billion in 2004, US$ 4.25 in 2005, and the estimated trade volume in 2006 is at US$ 5 billion.⁶ President Musharraf, while highlighting the objective of his visit said, “His visit was aimed at raising the level of economic cooperation between the two countries to make it compatible with the excellent diplomatic and political relations.”⁷ Although the current trade balance is still heavily in favour of China, the opportunities for Pakistani exports to China are growing. According to the Chinese Custom Authority, “Pakistan's export to China showed an upward trend, registering an increase of about 39.2 percent in 2005. The export was amounted to $832 million from January to December 2005. Whereas, it was at $594 million in the same period during the previous year (January-December. 2004). Therefore, the increase in Pakistan's export to China in a period of one year was amounted to about $ 238 million.”⁸ It is expected that if Pakistan’s economy continue to achieve the current growth rate the bilateral trade would reach at around US$ 8 billion by 2008.⁹ During President Musharraf’s visit the two sides inked 13 agreements and one MoU, aiming at boosting bilateral economic cooperation while covering a wide range of issues, including trade and economic cooperation as well as cooperation on energy, transportation, agriculture, health, population, seismology and meteorology.¹⁰ He also revealed that a feasibility study is being conducted to make Pakistan China’s “trade and energy corridor”. Pakistan provides the shortest possible route from Gwader through Karakorum Highway to the Western regions of China, which are undergoing a huge economic transformation. This route is secure, short and can serve as an alternate to the sea route that passes through Straits of Malacca. Up gradation of the economic cooperation has become an integral part of the overall Pakistan-China strategic cooperation.

The institutionalization of economic relations through the above-mentioned landmark visits have laid the foundation and set the direction of Pakistan-China cooperative relationship. Both the sides are determined to work hard for nurturing this relationship and translating the goodwill that exist between the people of the two countries for each other into a mutually beneficial win-win situation.

Analysing Pak-China Economic Relations

Pakistan-China economic relations at present can be termed as evolving and getting stronger day by day. Bilateral trade is surging, investment is increasing, and the number of development projects and joint ventures is also increasing. In the past, China has made valuable contribution to Pakistan’s economic development, particularly, in the development of infrastructure and setting up of basic industries. Presently, Pakistan and China are cooperating closely in the development of Gwadar Port, which would help economic activity in Pakistan and provide important access route to the sea for China’s Western regions, Afghanistan and Central Asian states. A large number of important projects such as the up gradation of Karakoram Highway, Thar Coal Mining, up-gradation of Pakistan Railways and Power Generation Projects – both nuclear and non-nuclear – are some of the examples of this expanding economic cooperation. Chinese support for Pakistan in economic sphere is being considered as “integral to Pakistan’s development.”¹¹ Trends in economic cooperation between China and Pakistan can be gauged from the incremental increase in activities in areas such as, trade, investments and development projects.

Pakistan-China Trade Relations

Since the early 1950, Pakistan and China have entered in trade relations, however, a formal Trade Agreement was signed in January 1963. Later, in October 1982, the two countries established Pakistan-China Joint Committee on Economy, Trade and Technology. Trade between China and Pakistan had generally been conducted under 1963 Trade Agreement, according to which, both countries had granted MFN status to each other. Pakistan had, at that time, multi-modal trade with China i.e. barter trade and cash trade, however, at present, trade with China is conducted almost entirely on cash basis in convertible currency. There has been an incremental growth in Pak-China trade in the last few years. The table given below shows the volume of bilateral trade between China (excluding Hong Kong) and Pakistan between 1999-2006.

(Value in million US$)

YEAR EXPORTS IMPORTS TOTAL BALANCE

1999-2000 180.326 471.527 651.853 (-)291.201

2000-2001 303.548 524.138 827.686 (-)220.59

2001-2002 228.631 575.219 803.85 (-)346.588

2002-03 244.591 839.056 1083.64 (-)594.465

2003-04 288.259 1153.470 1441.729 (-) 865.211

2004-05 354.092 1842.775 2196.867 (-) 1488.683

2005-06(July-Dec) 223.767 1331.331 1555.098 (-) 1107.564

Source; Ministry of Commerce, Government of Pakistan

Although the two-way trade has increased but, the volume of trade is still low. Traditionally, the trade balance has always been titled in favour of China, except for a short while in 1952, owing to China’s involvement in the Korean War. ¹² For decades China’s constant increase in exports to Pakistan resulted in a persistent and growing trade imbalance. The main items of Pakistan’s imports from China are machinery and parts, iron and steel manufactures, sugar, chemical materials, chemical elements and medical and pharmaceutical products. The main items of Pakistan’s exports to China are cotton fabrics, cotton yarn, petroleum and its products, fish and its preparations, leather, fruits and vegetables. Unfortunately, mix of Pakistan’s products exported to China is very narrow. Almost around 80% of its exports consist of cotton yarn and fabric.

Pakistan’s exports to China lack diversity and both the countries are competitors in the textile sector. Diversification of exports from Pakistan in the non-traditional items will lead to minimising the trade imbalance. Another important factor of our trade deficit with China is growing exports of Chinese products to Pakistan. Since these are more economical, businessmen are inclined to buy more from China. Pakistan therefore, should be looking at China not simply as an export market but as a primary source for import of capital goods and industrial raw material.

The two countries signed a Preferential Trade Arrangement (PTA) in November 2003, which is operational since January 1, 2004. Pakistan and China instituted a Joint Study Group to negotiate a Free Trade Agreement between the two countries and have simultaneously negotiated an Early Harvest Programme (EHP), which has become operational from January 1, 2006.¹³

According to Pakistan’s Ministry of Commerce, Pakistan has given market access on 118 tariff lines of organic chemicals and 268 tariff lines of machinery – 386 tariff lines in total. Except 30 tariff lines; 13 relating to organic chemicals and 17 relating to machinery. All the other tariff lines have MFN rate of 5 percent. As per the agreed timeframe of elimination of tariff Pakistan is required to reduce tariff only on 30 tariff lines since January 1, 2006. The tariff on the reset of the tariff lines i.e. 356 tariff lines has been reduced to zero on January 1, 2007 i.e. no immediate revenue implications. Similarly, China has brought to zero all tariffs on 767 items.¹⁴

Tariff Reduction Schedule

Existing Tariff Not later than Not later than Not later than

1 January 2006 1 January 2007 1 January 2008

16% and above 10% 5% 0%

5-10% 5% 0% 0%

Less than 5% 0% 0% 0%

Source: Ministry of Commerce, Government of Pakistan

Pakistan-China Investment Relations

Pakistan and China signed on February 12, 1989, a Bilateral Investment Treaty (BIT) that encourages promotion of bilateral investment both in China and Pakistan; covers all kinds of investments; protects investors and investments of both the countries against discrimination and expropriation; seeks fair and equitable treatment; and provides dispute resolution mechanism.

The overall Foreign Direct Investment (FDI) into Pakistan has risen by over 600 percent in the last five years.¹⁵ However, the Chinese share in the overall FDI is still very low. Pakistan has been able to introduce and implement investor friendly policies as a result of which FDI has increased. Pakistan’s investment policy is very liberal which offers all economic sectors for FDI. It provides equal treatment to local and foreign investors and allows 100 percent equity to foreign investors with no government sanction required. Full remittance of profits, capital, dividends royalty, technical and franchise fee is allowed. Complete legal cover is provided through Foreign Private Investment (Promotion & Protection) Act 1976, Protection of Economic Reforms Act 1992, and Foreign Currency Accounts (Protection) Ordinance 2001.¹⁶

Similarly, the Chinese government encourages foreign investment in the Chinese market, and has continuously liberalised and expanded the fields for investment. In recent years, China has liberalised further the restrictions imposed on the proportion of foreign equity in investment projects and opened new sectors to foreign investment. The newly–opened sectors include, telecommunications, urban water supply and drainage, construction and operation of gas and heat distribution network, which all were previously prohibited from any foreign investment. China has also opened further such service sectors as banking, insurance, distribution, trading right, tourism, telecommunications, transportation, accounting, auditing and legal services. Also, there are a number of laws protecting the interests of foreign investments.¹⁷

In recent years, China and Pakistan have witnessed steady growth in mutual investments, however, the scale of investments is still small. According to the Board of Investment’s statistics, out of the total FDI of 1524 million dollar, that came in Pakistan during July 2004-June 2005, the Chinese share was only US$ 443,763.

By 2004, the Chinese enterprises approved or recorded by the Ministry of Commerce in Pakistan totaled 34, with Chinese contractual investment of 104.11 million USD. In 2005, the number of registered Chinese companies in Pakistan reportedly grew more than fifty. At present, China’s investment in Pakistan (public& private) mainly covers the areas such as: Gwader port construction, exploration of coal and other resources, nuclear power stations, hydroelectric power stations, ship-building, machinery, infrastructure, construction agriculture and manufacturing. Pakistan has invested in 96 projects in China, with a contractual value of US$ 71.48 million, and an actual investment of US$ 17 million. ¹⁸ Details of the investments made by the Pakistan side in China are not available.

Mutual investment between China and Pakistan

Pakistan’s investment

in China (10,000 USD) 2003 2004 By 2004

Number of projects 19 21 96

Contractual value 1949 3210 7148

Actual investment 343 454 1700

China’s investment

in Pakistan (10,000 USD) 2003 2004 By 2004

Number of projects 4 3 34

Contractual value 930 7344 10411

Source: Chinese Feasibility Study on Free Trade Agreement (March 15, 2005)

Sector-wise Chinese investment for the period July 2004-June 2005 in US $

Sectors FDI from China

1. Metal Products 5,214

2. Transport Equipment (Motorcycles & automobiles) 151,068

3. Construction 189,000

4. Communications 22,287

5. Others 76,194

TOTAL 443,763

Source: Pakistan Board of Investment, http://www.pakboi.gov.pk/FDI/scw4-5.html

While, the Chinese public sector corporations are undertaking the mega projects in Pakistan, the private sector is also engaged in medium and small-scale projects, especially in the manufacturing and construction sectors. Some of the major Chinese companies, which are operating in Pakistan such as Heirs, ZTE, Howai Technologies, China National Petroleum Corporation, China State Construction Engineering Corporation, Dong Fang Electric Corporation, CMEs, China Ocean Shipping Corporation and Air China, are making good profits. The success of existing initiatives by the Chinese private sector companies in Pakistan would encourage and increase the investment from the Chinese private sector. On February 21, 2006, at Pakistan-China Investment Forum, Chinese and Pakistani private sector companies signed ¹⁹ agreements and MoUs worth US$ 500 million to undertake joint ventures in various sectors such as, real-estate development, Karachi mass transit communication network, chemical, fertilizer, automobile, and agro-based industry.19 These projects are to be implemented in the next four to five years’ time. Besides these areas of interest, an agreement between Habib Bank and City Bank of Urumqi for making investments in development projects, and an agreement between the National Bank of Pakistan and China Development Bank for joint financing of projects were also signed.²⁰

While, Pakistan seeks Chinese investment, the Chinese government encourages its public and private sector to actively take part in the projects based in Pakistan. “China’s public and private sector is undertaking over 250 projects in Pakistan from mega to small and from strategic to regular businesses. At present, over 60 Chinese companies have already established permanent offices in Pakistan.”²¹ The size of Chinese business in Pakistan is growing. In view of the political will that exists in both the countries for enhancing economic cooperation the process of expansion in bilateral economic cooperation has just begun. There is surely enormous potential for the growth of this relationship provided the process remains on track and certain enabling conditions for the future growth are successfully dealt with.

Opportunities and Challenges for Pakistan-China Economic Relations

Opportunities:

• The overall geo-strategic environment for regional cooperation is gradually becoming more favourable. Pakistan’s entry into Shanghai Cooperation Organisation as an Observer and China’s entry into SAARC as an Observer would allow Pakistan-China bilateral economic relations to grow with a regional perspective. Also, there is a convergence of economic interests at the strategic level, especially in area of energy security and communication networks.

• China has opened up its Western region adjacent to Pakistan for trade and investment in order to reduce the economic disparity between its developed coastal regions and other underdeveloped areas. Once developed, this region would be a hub for economic activity between China, Central Asia and South Asia. Pakistan’s desire to become a “corridor of trade and energy” for China and Central Asia by linking Gwadar through upgraded-KKH with these areas entails promising prospects.

• Pakistan’s economy has been maintaining a high growth rate in the last five years, and it is hoped that it would continue to maintain a high growth rate in the coming years. The growth in manufacturing sector, increase in exports and FDI, as a result of stable macroeconomic environment shows good prospects for the investor’s interest in Pakistan. Pakistan welcomes the Chinese investors from the private sector to come forward and invest in Pakistan. The possibilities of export related Joint ventures are expanding.

• China as part of its domestic reform process is aiming at raising the living standard of its rural population and increasing their purchasing power. The emerging Chinese domestic market offers huge potential for Pakistani exporters, especially in areas of agricultural, aquatic and leather products. According to the Chinese Feasibility Study on FTA, “The Pakistani commodities that have the greatest potential to be exported to China are tropical fruits. These fruits are widely planted in Pakistan, and China has already finished quarantine and inspection on Pakistani mangoes and citrus. After zero tariffs are levied, in North-west China, Pakistani fruits will enjoy certain advantages in both quality and price compared with the fruits grown in Southern China. Pakistan is also rich in fishery resources. With the adjustment of polices on fishery industry and the improvement of technology, the potential of Pakistan’s fishery industry will be unleashed. After the zero tariff policy is adopted, Pakistan will see a rise in its export to China.”

• Similarly, the potential for Chinese business to investment in Pakistan are enormous. At present the sectors identified for investment from China, includes energy-related projects, telecommunications, infrastructural projects, automobiles, motorcycles, tractors, air conditioners, refrigerators, televisions, mining, food processing, agriculture and construction.

• The implementation on the Early Harvest Programme (EHP) from January 2006 would facilitate growth in trade.

Challenges:

• Security environment in Pakistan, especially in the two of its western provinces is deterrence for Chinese private sector investment. The three unfortunate incidents in which Chinese workers got killed have negatively impacted on the potential Chinese investors. Ensuring the security of foreign workers is a serious challenge.

• China is fast integrating into the global economic system and its trade, investment and economic cooperation is now increasingly being directed by market forces rather than state planning as it used to be in the past. Corporations and industries are making their decisions simply on commercial viability and profitability of a particular project rather than directions or instructions from the Government. Engaging the Chinese private sector on long-term basis is important for sustainable economic relations.

• Also, making Pakistani private sector more innovative and pro-active is essential to produce any tangible results without which we may even lose our current level of trade to more competitive and aggressive market forces. We do not see it happening in a big way. Although. the government in Pakistan is patronizing the private sector and the role of public sector is being curtailed to creating enabling environment for the private sector endeavours.

• While the trade volume with China is on the increase, Pakistan’s exports does not show as sharp a rise as Pakistan’s imports from China. One major reason of increased imports from China is the supply of machinery and equipment for recent projects agreed between Pakistan and China like the Railways, Gwadar Port and Hydro Power Project etc. Moreover, a number of Chinese companies have won infrastructure project contracts in Pakistan through international bidding. All the machinery and equipment supplied by these companies for the projects comes from China. This trend has led to a phenomenal increase in China’s exports to Pakistan.

• Pakistan’s exports are centred mainly on cotton yarn and cotton fabric. However, there is an increasing trend in the export of seafood and leather. This potential can only be realised by revamping the processing technologies and producing internationally acceptable quality.

• While Pakistan’s most imports from China are value added, its more than 85 percent exports to China are raw materials, such as cotton yarn and fabric, chrome and copper ores. For example copper and gold from Saindak Copper-Gold Project is exported to China in semi-finished form and re-exported to Pakistan after adding value. We must add value to our exportable commodities in the country. It can be in the shape of joint ventures with the Chinese companies.

• Given Pakistan’s narrow base for exportable commodities – more than 75 percent of our exports originate from four items, namely cotton, rice, leather and sports goods. A diversification in exportable commodities and a proactive export policy of Pakistan could enhance the volume of trade and also rectify to a degree the trade imbalance. It will not be possible for Pakistan to increase its exports to China without diversifying exportable commodities. Pakistan should seek Chinese investment for projects aimed at export diversification. Chinese investment should be geared more to export oriented projects and less for the domestic requirements.

• Also Pakistan should seek Chinese investment in the manufacturing sector and not only the assembly activities. The Chinese companies involved in electronics, home appliances, automobile, motorcycles etc. are only the screwdriver assembly lines. Most of the parts are being imported from China and the companies enjoy a tax-break. Such activities neither create job-opportunities in the local market nor creates manufacturing base in the country. It is more beneficial for the Chinese companies than for the Pakistani economy.

• Another challenge to sustain progressive economic relationship is to establish best trade practices. It has been reported that the machinery being imported from China is usually under-invoiced in order to evade taxes. Such practices can be curtailed with the joint efforts by the two countries.

• Another challenge, for which both the countries have to work together, is the unregistered trade. There are huge quantities of a wide variety of items, which are being smuggled into Pakistan. Pakistani markets seemed to be flooded with such commodities.

• Pakistan and China need to establish the best business practices. Here the case in point is the supply of locomotives to Pakistan Railways by Chinese firm Dongfang Electric Corporation, and passenger coaches by China Machinery Import and Export Corporation (CMC) under an agreement signed in 2001. The engines were found faulty and sub-standard; the coaches were supplied at a higher price than offered by the same company recently. The media highlighted this. Such kind of dealings creates negative impact on the bilateral relations as well.

• Slow implementation on the agreements signed between the two governments does not reflect positively. Timely implementation on the decisions is a major challenge for, first building, and than sustaining momentum of the progressive economic cooperation.

All the challenges to Pakistan-China economic relations can effectively be turned into opportunities through comprehensive medium and long-term collaborative joint efforts. The things are moving in the right direction. The first session of “Pakistan and China Joint Study for Economic and Trade Cooperation” was held on May 20, 2006. The two sides have agreed to complete the study within one year. Based on this study, to initiate concrete action plan for uplifting the economic relations would be possible. The future of Pak-China economic relations seems to be promising.

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* Mr. Fazal-ur-Rahman is Director (East Asia), at the Institute of Strategic Studies, Islamabad. This is an updated version of the paper presented at the seminar on “55 years of Pakistan-China Relations,” organised by the Institute of Strategic Studies, on May 23, 2006.

1. Fazal-ur-Rahman, “Pakistan-China Relations in a Changing Geo-strategic Environment”, Strategic Studies, vol. xxii, No. 2, Summer 2002.

2. Ibid.

3. www.forisb.org

4. The Nation, December 18, 2004.

5. Bahzad Alam Khan, ‘China, Pakistan to strengthen defence ties’, Dawn, December 17, 2004.

6. “New heights of Pak-China ties”, by Mehmood-ul-Hassan Khan, March 5, 2006, at www.usa.mediamonitors.net/continent/view/full/27754.

7. The News, February 23, 2006.

8. http://pk2.mofcom.gov.cn/aarticle/chinanews/200602/20060201511502.html

9. Sweetness and light in Pakistan, by Federico Bordonaro, Asia Times, March 2, 2006, www.atime.com

10. www.mofa.cn

11. President Pervez Musharraf stated while speaking to the Chinese journalists that China was helping Pakistan with several development projects that were integral for the country’s progress. Daily Times, February 18, 2006.

12. During the Korean War, Pakistan not only abstained from voting on the UN resolution aimed at imposing an embargo on the export of certain goods to China and North Korea but also continued its trade relations with China. Pakistan at that time was looking for buyers of its raw jute and cotton and suppliers of coal. Pakistan’s exports to China in 1952, reached upto US$ 83.8 million and exports from China were only US$ 2.2 million. Following the ceasefire in Korean War, bilateral trade registered a sharp decline.

13. Under the EHP, Pakistan and China have given market access on 386 and 767 items respectively.

14. Ministry of Commerce, Government of Pakistan.

15. Presidents Musharraf’s address to Pak-China Business Forum, www.pesidentofpakista.gov.pk

16. www.pakboi.gov.pk.

17. Chinese Feasibility Study on Free Trade Agreement (March 15, 2005).

18. Chinese Feasibility Study on Free Trade Agreement (March 15, 2005)

19. The News, February 22, 2006.

20. Ibid.

21. New heights of Pakistan-China ties, by Mehmood-Ul-Hassan Khan, March 5, 2006, at http://usa.mediamonitors.net/content/view/full/227754.

Pakistan Foods

Pakistani Main Dishes

Chicken Jalfarezi Ginger Chicken Palak Muragh Anokhay Kabaab Raan Masaledar Prawns in Spicy Coconut Sauce

Chicken Masala Lamb Pasanday Taway kay Kabab Nauratan Galawat kay Kabab Shahi Korma

Pakistani Vegetable Dishes

Pokara Red Kidney Beans Red Lentil Soup Rice With Potatoes, Cilantro And Mint Vegetables in a Yoghurt and Coconut Sauce

Spiced Potatoes In Tamarind Sauce Pumpkin Fugadh Pumpkin Soup Uppama Alu Carrot Pickle Eggplant In Ginger-Tamarind Sauce

Pakistani Sauces

Aaloo Bukharay Ki Chutney Pokara Dipping Sauces Sambar Powder Rasam Powder

Kabab Sauce Podina Chutney Spiced Fruit Chutney

Pakistani Desserts

Kheer Kheer 2 Besan Burfi Sewian Mango Ice Cream

Rice Flour Pudding Gulab Jamuns Suji Halwa Carrot Halwa Rasgoola

Introduction About Pakistan

.1 Introduction

The Islamic Republic of Pakistan was founded in August 1947 as part of the separation of British India and the Eastern and Western sections of Pakistan. In 1971 Eastern Pakistan ceded to what is now the country of Bangladesh.

1.2 Geography

Pakistan has an area encompassing 796,096 square kilometers and is bordered by India on the east, China on the northeast, Afghanistan on the northwest while Iran shares its boarder in the southwest with the Arabian Sea bordering south.

Figure 2

Source: Ministry of Foreign Affairs, Kingdom of Thailand

1.3 Socio-economic Profile

Demographics

Pakistan is a multi-cultural society where many ethnic groups are represented and speak a variety of languages. Urdu is the national language of Pakistan, however, both Urdu and English are used in official matters and business transactions. Various dialects are spoken throughout the country while educational classes are usually tri-lingual with the regional language, Urdu and English.

Islam is the national religion, however, there are other minority religions such as Christianity and Hinduism.

Population

The population as of the 1998 census was 132.35 million, as compared to 85.09 million recorded in the 1981 census. The average growth rate over the past 10 years has been approximately 2% per annum. According to the Pakistan Government's Statistics Division, the population as of the end of 2003 was estimated at 148.72 million. As indicated in Table 1, over 50% of the total population is less than 20 years old, while 52% are males and 48% are females.

Table 1

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Population by Age 1998 Census(in thousands)

Age	Males	%	Females	%	Total	%
0 - 4	9,761	14.2	9,357	14.7	19,118	14.4
5 - 9	10,571	15.3	9,644	15.2	20,215	15.3
10 - 14	8,910	12.9	7,822	12.3	16,732	12.6
15 - 19	6,909	10.0	6,490	10.2	13,399	10.1
20 - 24	5,815	8.4	5,773	9.1	11,588	8.8
25 - 29	4,878	7.1	4,643	7.3	9,521	7.2
30 - 34	4,232	6.1	3,808	6.0	8,040	6.1
35 - 39	3,254	4.7	2,913	4.6	6,167	4.7
40 - 44	2,931	4.3	2,814	4.4	5,745	4.3
45 - 49	2,360	3.4	2,203	3.5	4,563	3.4
50 - 54	2,200	3.2	1,948	3.1	4,148	3.1
55 - 59	1,505	2.2	1,272	2.0	2,777	2.1
60 - 64	1,418	2.1	1,219	1.9	2,637	2.0
65 - 69	850	1.2	704	1.1	1,554	1.2
70 - 74	778	1.1	631	1.0	1,409	1.1
75+	849	1.2	714	1.1	1,563	1.2
FATA	1,652	2.4	1,524	2.4	3,176	2.4
Total	68,873	100.0	63,479	100.0	132,352	100.0
Gender Mixl		52.0		48.0

Note: FATA - Federally Administered Tribal Area
Source: Population Census Organization

The vast majority of the population lives in rural communities and villages, which, as indicated in Table 2, comprise over 67% of the total population..

Table 2

Population by Area 1998 Census (in thousands)

Area	Males	%	Females	%	Total	%
Urban	22,752	33.0	20,284	32.0	43,036	32.5
Rural	46,122	67.0	43,194	68.0	89,316	67.5
Total	68,874	100.0	63,478	100.0	132,352	100.0

Source: Population Census Organization

Labor Force

According to the Asian Development Bank (ADB), the labor force stood at 42.13 million people as of 30 June 2002. Unemployment was 3.2% of the labor force, or 3.29 million for the same period end.

Table 3

Percentage Distribution of Employed Persons By Major Occupational Groups 2001 - 2002

Occupational Groups	Employer	Employee	Self - Employed	Un-paid Family Helper	Total
Legislators, Senior Officials and Managers	0.5	1.1	8.1	1.9	11.6
Professionals	0.1	1.7	0.3	0.0	2.1
Technicians and Associate Professionals	0.0	4.0	0.6	0.1	4.8
Clerks	-	1.7	0.0	0.0	1.7
Service workers and Shop and Market Sales Workers	0.0	4.5	0.7	0.5	5.7
Skilled Agricultural Fishery Workers	0.0	0.3	20.3	14.1	34.7
Craft and Related Trade Workers	0.1	9.8	4.6	1.7	16.2
Plant and Machine Operators and Assemblers	0.1	2.9	0.8	0.1	3.9
Elementary (unskilled) Occupations	-	14.0	3.1	2.3	19.4
Total	0.8	39.9	38.5	20.8	100.0

Source:Pakistan 2004 Statistical Pocket Book Labour Force Survey

Poverty Levels:

According to the National Ten Year Perspective Development Plan 2001 - 2011 prepared by the Government of Pakistan Planning Commission, there were approximately 47 million people that fell below the food poverty line defined as not able to incur the food expenditure needed to achieve the minimum required level of calorie intake as defined as 2,150 calories per day. Table 4 indicates the increase in the number of the population considered under the calorie intake poverty line from 26.9% of the population in 1986 to 28.7% in 2000.

Table 4

Poverty Under Calorie Based Approach

Year	Male	Female	Total
1986 - 1987	24.5	29.4	26.9
1987 - 1988	22.7	29.9	26.4
1990 - 1991	18	26.2	23.3
1999 - 2000	27.6	29.2	28.7

Source:Ten Year Perspective Development Plan 2001 - 2011

Table 5

Gross Domestic Product Current Factor Cost (in Millions) 2002 - 2003

Sectors	Rupees	US$	% of Total
Agriculture	864,828	14,480	23.3
Industrial	871,250	14,588	23.5
Services
• Transport, Storage and Communications	440,951	7,383	-
• Wholesale and Retail Trade	562,070	9,411	-
• Finance and Insurance	114,105	1,911	-
• Ownership of Dwellings	183,383	3,071	-
• Public Admin and Defense	316,967	5,307	-
• Community, Social and Personal Services	356,116	5,963	-
Total Services	1,973,592	33,045	53.2
Total GDP	3,709,670	62,114	100.0

Source:Pakistan 2004 Statistical Pocket Book Federal Bureau of Statistics Average Foreign Exchange rate for 2002 was 59.72:US1

Budget

Table 6

Expenditures met from Revenue Budget 2003 - 2004 (in Millions)

	Rupee	US$	%
Revenue Receipts	728,370	12,196	-
Non-Development Expenditures
• General Administration	58,596	981	8.3
• Defense	160,250	2,683	22.7
• Law and Order	12,334	207	1.8
• Community Services	8,571	144	1.2
• Education	9,645	161	1.4
• Health	2,795	47	0.4
• Social Security and Welfare	2,959	50	0.4
• Other Social Services	1,004	17	0.1
• Agriculture and Irrigation	1,261	21	0.2
• Rural Development	46	1	0.0
• Transport and Communication	2,248	38	0.3
• Other Economic Services	1,111	19	0.2
• Subsidies	64,517	1,080	9.2
• Debt Servicing Investable Funds / Grants	318,026	5,325	45.1
• Un-allocable	1,872	31	0.3
Development Expenditure	59,243	992	8.4
Total	704,478	11,796	100.0
Surplus	23,892	400	-

Source:Pakistan 2004 Statistical Pocket Book Federal Government Budget. Average Foreign Exchange for 2002 was 59.72:us

Imports

Table 7

Imports by Commodity 2002 - 2003 (in Millions)

Commodity	Rupee	In US$	% of Total
Mineral Fuels, and Related Material	184,204	3,084	25.8
Machinery and Transport	171,904	2,878	24.1
Chemicals	126,404	2,116	17.7
Manufactured Goods Classified by Material	71,772	1,202	10.0
Crude Materials (except fuels)	53,964	904	7.6
Animal or Vegetable Oils	40,654	681	5.7
Food and Live Animals	29,000	486	4.1
Miscellaneous Manufactured Articles	21,380	358	3.0
Commodities and Transaction Not Classified	14,720	246	2.1
Beverages / Tobacco	368	6	0.1
Total	714,370	11,961	100.0

Note: Pakistan 2004 Statistical Pocket Book Federal Bureau of Statistics Average Foreign Exchange for 2002 was 59.72:US1

Exports

Table 8

Exports by Commodity 2002 - 2003 (In Millions)

Commodity	In Rupee	In US$	% of Total
Manufactured Goods Classified by Material	344,328	5,765	52.8
Miscellaneous Manufactured Articles	190,982	3,198	29.3
Food and Animals	68,638	1,149	10.5
Mineral Fuels and Related Material	14,547	244	2.2
Chemicals	15,247	255	2.3
Crude Materials (except Fuels)	11,845	198	1.8
Machinery and Transport Equipment	4,328	72	0.7
Animal Oils	1,450	24	0.2
Beverages / Tobacco	627	10	0.1
Commodities and Transactions Not Classified	302	5	0.0
Total	652,294	10,922	100.0

Source: Pakistan 2004 Statistical Pocket Book Federal Bureau of Statistics Average Foreign Exchange for 2002 was 59.72 : US1

1.4 Government

Pakistan is a democratic system of government with a bicameral Parliament consisting of a Senate and National Assembly. The Senate is indirectly elected by provincial assemblies to serve 4 year terms, while the National Assembly is elected by popular vote to serve 4 year terms. There are four provincial assemblies and a system of district governments. The head of state is the Prime Minister who is selected by the national Assembly for a 4 year term. The Cabinet is appointed by the Prime Minister. The President is elected by Parliament for a 5 year term.

1.5 National Social Welfare System

The social protection system in Pakistan includes old-age, invalidity and widow pensions and health care governed by the Employees Old-age Benefits Institution (EOBI) and Provincial Social Security Institutions. Being a federal subject , the old-age benefits provided by EOBI are regulated and administered at the federal level, whereas medical care is a provincial subject and is provided by the Employee' Social Security Institution of each Province under similar legislation.

Pension Plans

A large section of the population is not provided pension or old-age benefits. All government employees and their dependents, however, are entitled to life pension, widow pension and commutation of a portion of pension and free medical care. A small number of employees of registered industrial establishments or a commercial establishment have been covered under the EOBI scheme in 1979. The EOBI is funded by an employer contribution of 5% of wages and a limited Federal contribution and provides monetary benefits to its insured persons in their old-age, in the event of their becoming disabled/invalid owing to injuries/diseases. Survivor pension is also provided in the event of the death of an insured person to the widow for life.

Social Security System

The Social Security System provides protection against the economic and social distress that result in stoppage of or substantial reduction of earnings resulting from old age, employment injury, unemployment, invalidity, death or sickness.

The Social Security Scheme was launched in 1967 under the West Pakistan Employees' Social Security Ordinance of 1965 with the assistance of the International Labour Organization (ILO). The Social Security scheme which covers establishments employing 5 or more workers provides medical care facilities and cash benefits to the secured workers and their dependants. Secured workers are entitled for cash benefits in the event of sickness, employment injury, maternity and disablement pension whereas dependants are entitled for survivors pension and death grants. Workers drawing wages up to Rs. 3,000 per month or Rs. 120 per day and employed in registered establishments are liable to be covered under the Scheme in accordance with the provisions of the Social Security Ordinance.

The main source of income is the Social Security contribution. Employers covered under the Scheme contribute towards the Scheme at 7% of their wages paid to insurable workers. During the 1999-2000 fiscal year, the Punjab Employees Social Security Institution (PESSI) and the Sindh Employees Social Security Institution (SESSI) paid more than Rs. 1 billion to approximately 700,000 workers and 40,000 dependents.

1.6 Education Profile

Education System:

There are four distinct tiers within the education system in Pakistan. The four levels of education are: primary (grades 1-5); secondary (grades 6-10); higher secondary or intermediate (grades 11-12); and graduate and post-graduate or higher (grades 13-16).

Primary Education

Primary education in Pakistan ranges from grades 1 - 5. Under the current education policy 1998-2010, there is a big effort to universalize education at this level. It is envisioned that all children throughout the country aged 5-10 will receive at least a basic primary education. One effort in achieving this goal is through enforcing co-education, thereby alleviating some of the strain on the system. This is the only stage of education that males and females are educated together until university.

The language of instruction is Urdu or the regional language of the area. There are some "English" schools but these are mostly in the private sector. The primary level curriculum is primarily uniform throughout the country. Promotion from one grade to the other depends on in-house annual examinations.

Secondary Education

Secondary schooling consists of two well defined stages: middle school (grades 6-8) and high school (grades 9-10). The age group covered by this stage is 11-18 year olds. There is a matriculation or secondary school certificate (S.S.C.) exam at the end of the 10th grade. The medium of instruction is Urdu except in "English" schools. The curriculum at this stage begins to be specialized.

Four compulsory subjects are taught at this level: Urdu, English, Pakistan Studies and Islamic Studies with an additional four subjects as chosen by the student. Two distinguishing features of the secondary school curriculum are: 1) there is a strong re-orientation towards the sciences; 2) there is a diversification of the program so as to offer a large number of technical and vocational subjects.

Higher Secondary

Higher Secondary education comprises grades 11-12 and is also known as intermediate college level. This level leads to the intermediate exam or higher secondary certificate (H.S.C. formerly FA/FSC) which is the pre-requisite for entrance to university or an institution of higher education. English is the medium of instruction at this level, which has been problematic since most education to this point has either been conducted in Urdu or a regional language. This causes a great disparity between students coming from private English high schools and those coming from government schools. This disparity has solicited a change in most intermediate colleges which now have switched to Urdu as the medium of instruction.

Public exams for the secondary school and higher secondary school certificates are conducted by the Board of Intermediate and Secondary Education at the end of grades 10 and 12 respectively.

University Education

Universities in Pakistan offer higher level degrees in general and professional education. Undergraduate studies for Bachelors degrees in arts and sciences require two years of study for completion. An honors bachelor degree takes three years. This distinction makes the difference in the length of time it takes to complete a Masters program.

Table 9

Number of Primary, Middle and High Schools 2001 - 2002

Type of School	Schools	(In 000's) Enrolment	Number of Teachers
Primary	149,085	17,529	414
Middle	26,790	3,821	230
High	15,051	1,574	270
Total	190,926	22,924	914

Source: Pakistan 2004 Statistical Pocketbook Federal Education Management Information System

Enrolment Ratios:

According to the World Health Organization (WHO) first level primary education overall enrolment rates were 72% as of 2002 while male and female enrolment rates were 83% and 61% respectively. Secondary level overall enrolment rates were 41% while male enrolment rates were 45% and female enrolment rates were 35%.

Public Expenditure on Education

Based on the 2003 - 2004 Federal Government Budget, allocations for education was targeted at 9.6 Billion Rupees (US$193 million), which comprises only 1.4% of the overall budget. It should be noted however that the Zakat Ordinance mandates that 2.5% of all declared fixed financial assets are extracted by the Government at the beginning of the month of Ramadan. Zakat funds are distributed through local committees which are used to fund (among various other social services) religious schools. Figures for education allocation from Zakat funds was not readily available for this report.

Literacy Rates

According to the Population Census Organization, the 1998 Census indicated a literacy rate for the total population of 43.9% with females having a significantly lower rate of 32%. Rural literacy was also recorded as much less than the national average at 33.6% with females only achieving a 20.1% literacy rate.

Table 10

Literacy Rates 1998 Census Aged 10 and above

	Urban	Rural	Total
Male	70.0	46.4	54.8
Female	55.2	20.1	32.0
Total	63.1	33.6	43.9

Source: Pakistan 2004 Statistical Pocket Book Population Census Organization

1.7 Health Profile

According to The World Health Organization (WHO) life expectancy at birth for the total population is 63.7 years for males and 63.4 years for females. Infant mortality per 1,000 live births is 82. According to the Health Division of Pakistan there were 906 hospitals in 2002 with over 101,500 registered physicians and over 44,500 registered nurses. Table 11 highlights other selected health facility indicators

Table 11

Selected Health Facility Indicators 2002

Type
Hospitals	906
Dispensaries	4,590
Maternity and Child H.C.	862
T.B. Clinics	285
Rural Health Centers	550
Basic Health Units and Sub H.C.	5,380
Beds in above Institutions	98,264
Registered Doctors	101,635
Registered Nurses	44,520
Midwives	23,084

Source: Pakistan 2004 Statistical Pocket Book Health Division

HIV/AIDS has not been a significant threat to Pakistan. It was estimated by the WHO that there is a prevalence rate of less than 1% in Pakistan with approximately 73,000 people living with HIV/AIDS in 2002. According to the Government of Pakistan there were 1,998 reported cases of HIV/AIDS in 2002. Based on the WHO estimates of people living with HIV/AIDS, deaths related to HIV/AIDS would have been approximately 3,500 in 2002.

1.8 Information Communication Technology

According to the National Telecommunication Corporation, as of the end of 2003, there were a total of 2,404,400 mobile phone subscribers. According to the Pakistan Software Export Board there were a total of 131 internet service providers in Pakistan at the end of 2003, with an estimated 6,000 internet users. The internet code for Pakistan is .pk.