In June 2024, the Prime Minister visited China to rejuvenate the China-Pakistan Economic Corridor and attract investment in manufacturing, ICT, and agriculture. Strengthening the "Iron Brothers" bond, the visit focused on creating an investor-friendly environment to leverage the Belt and Road Initiative for economic growth.

The Prime Minister visited China in the first week of June 2024 at the head of a strong official-cum business delegation. The principal purpose of the visit was to reinvigorate the China-Pakistan Economic Corridor (CPEC), as it goes into its second phase, and seek more Chinese investment, particularly in manufacturing, information and communication technology (ICT) and agriculture sectors. The tremendous goodwill that exists between the two countries, referred to as “Iron Brothers”, will certainly serve as a catalyst in realizing this end. 
That said, in order to attract substantial capital inflows from China, we need to understand the priorities and preferences of the Chinese and put in place the right investor-friendly environment.  
The CPEC is the part of China’s flagship Belt and Road Initiative (BRI). Unveiled in 2013 by President Xi Jinping, the BRI aims at promoting multilateral development and prosperity through enhanced connectivity, trade and economic integration, and capital inflows into member countries. According to a Chinese government report, by June 2023, China had signed more than 200 cooperation agreements with over 150 countries and 30 international organizations under the BRI umbrella. Between 2013 and 2022, the cumulative value of trade between China and BRI partner countries reached USD 19.1 trillion, while total Chinese investment into partner countries sat at USD 240 billion. 
Putting in place the right infrastructure and building trade corridors also played a capital role in China’s own development saga. Since China is a gigantic country, both raw materials and final goods have to be shifted from one part of the country to another over an enormous distance. That necessitated huge investments in overcoming transportation bottlenecks. China wants to replicate a similar model in the BRI, which would cut back significantly on the time and cost of international trade.
China is the world’s second largest economy, the largest manufacturer, the largest exporter and the second largest importer of goods. As China seeks to consolidate and strengthen its economic position, it’s putting a high premium on three things in the main: seamless and efficient trade flows, food and energy security, and high-quality development. The BRI includes all these three aims. 
On account of the size and growth of its economy as well as the 1.4 billion-plus population, China’s energy needs are ever growing. Already, it’s the globe’s largest energy consumer and importer of petroleum products. Ensuring timely and uninterrupted energy supplies is thus a priority for Beijing. Another priority is food security. Due to rapid industrialization, the share of agriculture in China’s gross domestic product (GDP) has been shrinking. Presently, it accounts for less than 8 percent of the overall economic product, making it increasingly dependent on food import. Hence, for Pakistan, where agriculture accounts for about 24 percent of the economy, the raw and processed food sector offers a wide scope for cooperation with China. 
Partly because of its focus on high-quality development and partly because of increase in wages, China is relocating its heavy and labor-intensive industries to less developed economies. Given its market size and a large labor force exceeding 70 million, Pakistan is eyeing to become a significant destination for China’s industrial relocation. Not only that, Pakistan also has the potential to attract Chinese investment into advanced sectors, such as automobiles (including electric vehicles) and information and communication technologies (ICT). 

As one of the six corridors under the BRI, CPEC was unveiled in 2013. Since then, China has become Pakistan’s largest trading partner and the largest source of foreign direct investment (FDI). Between FY2014 and FY2024 (July-April), net Chinese FDI into Pakistan totaled USD 7.29 billion, which makes up 35 percent of worldwide FDI of USD 20.87 billion into the country during this period (State Bank of Pakistan data). In the first phase of CPEC, the bulk of the Chinese investment went into infrastructure and energy sectors with a view to overcoming the bottlenecks in these sectors and providing an enabling environment for subsequent investment into manufacturing and agriculture.    
According to Ministry of Planning, Development and Special Initiatives, in the first decade of CPEC (July 2013 to July 2023), some 888 km of road network was laid and over 8000 megawatts (MWs) of energy added to the national grid. In addition, an 820 km long cross border optical fiber cable was laid. CPEC generated 200,000 jobs and contributed up to 2 percent to the national GDP. A crowning achievement of the Pakistan-China cooperation is the Gwadar Port, the world’s largest deep-sea port, which will contribute to making Pakistan a trade and transit hub. The Gwadar Port also substantially cuts back on the time and thus cost of China’s trade with Middle East, Europe, and North America. For example, while the shipment time between the Shanghai Port, China’s largest port, and Jeddah (Saudi Arabia) is 26 days, that between the Gwadar Port and the Saudi port is only eight days. Likewise, the shipment time between the Gwadar Port and Hamburg Port (Germany) is 25 days compared with 43 days between the Shanghai Port and the German Port. This means that if Chinese companies manufacture in Pakistan and then export to the Middle Eastern or western countries, they will save a pretty penny on the cost of shipment.
Under the CPEC, China will also help Pakistan overcome its supply-side constraints through development of special economic zones (SEZs) and modernization of agriculture. Despite being an agro-based economy, Pakistan is a net food importer to the tune of USD 1.5 billion a year mainly because of productivity glitches. Pakistan is also eyeing relocation of some of China’s heavy or labor-intensive industry to give a significant boost to its manufacturing base and exports. 
In order to optimize the potential benefits of CPEC 2.0, the following suggestions are made: 
In the first phase of CPEC, the investment was undertaken mainly by mega state-owned Chinese enterprises. In the second phase, the investment will be done mainly by private sector small or medium sized enterprises (SMEs), facing increased wages, and thus rising production costs, at home or otherwise looking to go global. Compared with large-scale enterprises, the size of SMEs’ investment will be much smaller, they will be far more risk averse and look for a more attractive investment package. In China, all land is publicly owned and is leased out to businesses at competitive rates. While investing in Pakistan, or for that matter in any other country, the Chinese enterprises will look to economize on the cost of land acquisition. Hence, the Pakistan government may subsidize land acquisition for Chinese enterprises. Alternately, Pakistani companies looking to enter into joint ventures (JVs) with their Chinese counterparts may offer them land, while seeking capital investment (machinery, equipment) from the Chinese as part of the bargain. Hence, while pitching JV proposals to their Chinese counterparts, Pakistani businesses may clearly spell out the facilities that they would provide and what they expect from the other side. 
In Pakistan, the SEZs being set up under CPEC and otherwise are supposed to provide a wide range of opportunities to give momentum to industrialization. The role of Chinese enterprises and FDI would be crucial in success of the SEZs in Pakistan. This will require to develop SEZs by providing a comprehensive set of incentives and competitive policies governing modern SEZs to attract Chinese enterprises. In this regard, Pakistan may consider key factors derived from the Chinese experience of successful development of the SEZs. 

As China seeks to consolidate and strengthen its economic position, it’s putting a high premium on three things in the main: seamless and efficient trade flows, food and energy security, and high-quality development.

In China, SEZs, free trade zones (FTZs), and technological zones, collectively called economic development zones (EDZs), have played a lead role in attracting foreign investment. In Pakistan, SEZs mainly offer import duty and corporate income tax concessions. The Chinese SEZs, however, were basically areas exempted from the application of various domestic laws, rules and procedures (such as environmental and labor regulations) to maximize facilitation to investors. This was a logical strategy, because if SEZs offer the same regulatory environment that the rest of the country provides, then there is little rationale for marking out such special investment zones. Hence, the government may consider taking a leaf out of the Chinese book and introduce a more liberal regulatory regime in the SEZs to cut the cost of doing business for the investors from China and elsewhere.
Pakistan is almost at the same level of development where China was when it embarked on economic reforms in early 1980s. Like present-day Pakistan, China’s comparative advantage consisted in low labor costs. Therefore, the early SEZs established in China focused on labor-intensive manufacturing, which gradually gave way to capital-intensive industries, as the country moved ahead on development trajectory. Pakistan may also adopt a similar approach and focus on labor-intensive manufacturing, such as garments and leather articles where abundant raw materials and skilled workforce are also available, in the SEZs and incrementally move towards advanced industries. This will also help address the unemployment problem. 
Emphasis may be placed on systematic planning of the SEZs with futuristic planning for expansion and development. Following the Chinese example, the principle of “master planning for the whole zone but developing in a phased approach” may be considered for establishment of modern SEZs in Pakistan.

For Pakistan, where agriculture accounts for about 24 percent of the economy, the raw and processed food sector offers a wide scope for cooperation with China. 

In China, SEZs/EDZs are managed by local governments, which more or less replicate the structure of the central government. Since Pakistan has a different administrative system, it’s difficult to completely adopt the Chinese system of SEZ governance. Nevertheless, smooth coordination among the different tiers of government is essential. In Pakistan, foreign investment policies and packages are framed by the federal government but their implementation rests mostly with provincial and local governments. Hence, it’s crucial to build both the orientation and capacity of local government officials for investment promotion. In China, investment and export promotion is the key component of performance appraisal of the officials from the governor (in provinces) and mayor (in cities) downward. Hence, the entire government machinery is geared towards accomplishing this task. Pakistan may also consider to introduce this key performance indicator for divisional commissioner and deputy commissioner downward.    
Investor facilitation is a key to attracting investment. SEZs need to be run by highly competent professionals selected from the government or recruited from the market. As in China, each SEZ may have a fully authorized service center to provide first‐class services to investors from registration, licensing, taxation, and information about trade and investment related policies to aftercare. Investors may not have to move from one department (federal, provincial, local) to another to secure the necessary authorizations or permits. Use of digitization and online system would greatly enhance service delivery in SEZs.
The SEZs should provide world class hard infrastructure. In most zones in China, the infrastructure provision follows the standard of “five connections and one leveling,” but the more developed zones now incorporate “nine connections and one leveling” (nine connections are: road, electricity, water, drainage, waste water disposal/treatment, gas, telecom, heating, and cable TV, and one levelling refers to the land leveling). All these greatly help to cut the production and business costs and make a SEZ attractive for investors. 
To secure qualified labor for investors, SEZs should establish an efficient labor market system. If firms need a large number of specialized skills not available locally, the SEZs should have a mechanism in place to work with relevant colleges and universities nationwide to arrange targeted recruitment activities. Furthermore, SEZs may set up their own technical and vocational colleges and these may be allowed to develop their own curriculum and training materials based on the specific needs of the enterprises. The presence of supporting industries is an important element of competitive industrial clusters and for developing an ecosystem of allied industries.
In China, SEZs represent a blend of industrialization and urbanization. They are not only a place to work but also a place to live, with all modern amenities, such as hospitals, educational institutions and recreation facilities, so as to attract high-end investment and talent. SEZs in Pakistan may also be designed on this model as nearly as possible.
Pakistan has a free trade agreement (FTA) with China, signed in 2006 and upgraded in 2020, under which nearly a half of the goods traded between the two countries are exempt from import taxes. Building on the FTA, the government may work out an arrangement with China, whereby all the goods produced by Chinese enterprises in the SEZs may enter China duty free. Such an arrangement will significantly boost Pakistan as a destination for Chinese enterprises as well as benefit Chinese consumers.
Finally, security of investors, workers and assets is an element that can’t be over-emphasized. The government and the security agencies are going all out to improve the overall security environment in the country. This is an ongoing process.
According to Ministry of Commerce of China, in 2022, China’s FDI into Pakistan amounted to USD 560 million out of worldwide outward FDI of USD 146.5 billion, thus giving Pakistan only 0.4 percent share in China’s global investment. If we can get even 3 percent share in China’s global outward FDI, we will get more than USD 4 billion FDI from China every year. It’s time to upgrade our investment regime, drawing upon the Chinese experience.

The author contributes on national and international issues with a special interest in Chinese economy, governance, and development model.
Email: [email protected]