The deal is in, and it’s as big as initially reported: Chinese President Xi Jinping has signed a series of MOUs and contracts worth $46 billion with Pakistan’s Prime Minister Nawaz Sharif. Apart from a massive overland corridor designed to give China easier access to trade with the Middle East, the deal includes 21 agreements on gas, coal, and solar energy projects designed to provide an estimated 16,400 megawatts of electricity to an energy-starved Pakistan—roughly equivalent to Pakistan’s entire capacity today.But perhaps more interesting than the specifics of the deal is how China is planning to pay for these and other upcoming development projects. The Financial Times:
China will draw on its massive foreign exchange reserves to inject $62bn of capital into state-owned “policy banks” in support of its ambitious “New Silk Road” plans to build infrastructure links to foreign markets. […]Extra financing for infrastructure could help support China’s weakening economy and the majority of foreign construction projects will most likely be undertaken by Chinese companies.
Increased foreign currency lending would likely also help China boost financial returns on its forex reserves, which are now mainly invested in low-yielding US treasuries.
An amount like $62 billion is just a drop in the bucket for China’s foreign exchange reserves, which currently total $3.7 trillion. And with interest rates at historic lows around the world, why not use a small fraction of your massive reserves on risky but massive-scale infrastructure projects with potentially huge payoffs in the future?More important than the financial considerations is the fact that China is using what it has to advance its regional goals. And it turns out that the “investing money in neighbors” strategy is more popular than the “threatening neighbors over boundary issues” option (shocking news, we know). In fact, China is putting considerable pressure on Obama’s whole “pivot to Asia”, arguably the most important foreign policy success that he has enjoyed as President. As we saw with the Asian Infrastructure Investment Bank PR fiasco, Team Obama does not yet seem to have an effective counter.