China's $2 Billion Pakistan Loan Shows Desire to Keep Khan Close

(Bloomberg) -- If there were any doubts about China's intent to keep ties close with its all-weather ally Pakistan, Beijing demolished them with a reported $2 billion loan just days after the election of a new Pakistani premier.

While cricketing legend Imran Khan attempts to form a coalition government, China has stepped up to reinforce a geopolitical alliance that shapes the South Asian nation's policies toward the U.S. and India. The announcement caused Pakistan's rupee to jump the most in nearly a decade as Khan takes power with an economy in chaos.

The gesture speaks to Pakistan's overwhelming reliance on China as a source of financial, diplomatic and military support at a time when U.S. President Donald Trump has cut military aid to Islamabad. Ultimately, Khan may not have a choice. Pakistan's powerful military has continued to push its civilian counterparts for close ties with China in order to ensure the flow of more than $60 billion in loans for the China-Pakistan Economic Corridor infrastructure projects.

“There is a deep, far-reaching political consensus in Pakistan for a continued strong partnership with Beijing,” said Michael Kugelman, a senior associate for South Asia at the Woodrow Wilson Center in Washington. “This is especially true now, with Pakistan's relationship with America facing an uncertain future.”

Closer to China

Khan and his Pakistan Tehreek-e-Insaf, or Movement for Justice, won the most seats in an election last week that was marred by allegations of military interference. Like China, Khan acted quickly to send a public message.

“Our neighbor is China, we will further strengthen our relations with it,” Khan said as he declared victory in a televised statement. “The CPEC project which China started in Pakistan will give us chance to bring in investment to Pakistan.”

Speaking at a regular press briefing on July 30, Geng Shuang, a spokesman for China's foreign ministry said China welcomed the new government. Khan “will likely try to balance the U.S. and China, but China and Pakistan are mutually dependent," said Wang Yiwei, director of Renmin University's Institute of International Affairs in Beijing. "He won't be able to change that.”

While China was initially focused on former premier Nawaz Sharif's Pakistan Muslim League-Nawaz, or PML-N, Beijing has “diversified its contacts and investments” in Pakistan, said Dhruva Jaishankar, a foreign policy fellow at Brookings India. At the same time, Pakistan's military -- which has ruled the country outright for much of its 71-year history -- defines the country's policy toward CPEC projects.

Khan “does not have a lot of wiggle room,” Jaishankar said. “We may continue to see a gradual trend of Pakistan drifting closer to China and more distant from the United States. But that would have to do with a number of factors beyond Imran Khan's election.”

Indeed, the political consensus on China is especially important now, said Kugelman. “Pakistan needs powerful friends, and China is one of the few that Islamabad can depend on -- Khan knows this, and he'll do what's necessary to ensure that the China-Pakistan relationship remains strong,” he said.

China Debt

One of the most crucial tasks ahead of Khan is Pakistan's ailing economy, which analysts say is likely to push Pakistan toward yet another International Monetary Fund bailout.

Over the weekend, Karachi's Express Tribune newspaper, citing unnamed finance ministry officials, reported that Beijing authorized a $2 billion loan to help Islamabad weather the economic crisis. The Islamic Development Bank, a multilateral lender based in Saudi Arabia, also activated a three-year $4.5 billion oil-financing facility, the paper said. A finance ministry spokesman didn't respond to calls or messages seeking comment on Tuesday.

The amount of Chinese loans given to Pakistan over the last 13 months alone comes close to the IMF's last loan of $6.2 billion. Those vast debts to China have prompted worries from U.S. Secretary of State Mike Pompeo, who told CNBC that he would be watching to see if Khan's new government uses IMF funds to pay off Chinese loans.

“We want the U.S. to see our ties without mixing it up with China,” Fawad Chaudhry, a spokesman for Khan's party, said by phone on Wednesday. “We haven't yet taken a final decision to go to the IMF, though we hope the U.S. won't hinder if we seek the fund's support.”

The new Chinese loan will help Pakistan shore up falling foreign exchange reserves, said Najam Rafique, director of the Islamabad-based Institute of Strategic Studies. He added that Khan leans toward boosting ties with China.

“China isn't a distant power, it's a neighbor,” Rafique said. Khan “will be trying to improve and build upon what's already in process.”

--With assistance from Ismail Dilawar and Faseeh Mangi.

To contact the reporters on this story: Iain Marlow in New Delhi at imarlow1@bloomberg.net;Peter Martin in Beijing at pmartin138@bloomberg.net;Kamran Haider in Islamabad at khaider2@bloomberg.net

To contact the editors responsible for this story: Ruth Pollard at rpollard2@bloomberg.net, Chris Kay