In Rush to Trade in Yuan, Pakistan Trades Its Sovereignty to China

By deciding to trade in Chinese Yuan with China instead of USD, is Pakistan actually trading its own sovereignty? 

4 min read
In Rush to Trade in Yuan, Pakistan Trades Its Sovereignty to China
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Pakistan has announced its decision to replace the US Dollar (USD) with the Chinese Yuan (CNY) for bilateral trade between the two countries. For 2016, trade between the two countries stood at USD 15.3 billion.

This announcement was made on the eve of launch of Long Term Plan (LTP) for the China-Pakistan Economic Corridor (CPEC) 2017-30, a key project under China’s One Belt One Road (OBOR) initiative.

OBOR will bring investments of around USD 60 billion to Pakistan and will extend from Gwadar Port in Pakistan to Kashgar in Western China.

Under the broader development of CPEC projects and negotiations, Pakistan’s hurried move towards trade in CNY could unleash an unfavourable ripple effect on Pakistan’s political economy. There are enough reasons to believe that these effects, put together, may translate into Pakistan trading its sovereignty away in its asymmetrical relation with China.


Overview of Pak-China Trade Relations

  • Pakistan announced decision to replace US Dollar with Chinese Yuan (CNY) for bilateral trade between the two countries
  • Pak’s announcement was made on the eve of launch of Long Term Plan (LTP) for CPEC 2017-30
  • CPEC will bring investments of nearly USD 60 billion to Pakistan
  • Pak’s announcement comes in the wake of the US suspending security assistance to Pakistan
  • Despite criticism from Pakistan’s State Bank and Ministry of Finance, the country announced trade in CNY
  • If CPEC fails to deliver on promises, Pakistan will be staring at a huge debt
  • Any mishap in CPEC will lead Pakistan to lose its strategic Gwadar Port to Chinese ownership

A New Hegemon in Town

First, this announcement has come in the wake of the United States, under Donald Trump’s leadership, deciding to suspend security assistance to Pakistan. This is a clear and definite crack in Pakistan’s Cold War-era policy of siding with the then hegemon – the United States – to protect its interests in the region. This is also a departure for the United States from its engagement policy on Pakistan since 9/11.

As soon as this crack appeared, Pakistan wasted no time in extending support to its ‘all-weather friend’ China by announcing trade in CNY, despite vocal criticism from its State Bank and Ministry of Finance earlier. This move was also driven by the changing global perception that the United States is no longer a hegemon, at least in Asia.

It would be too harsh to single out Pakistan for its changing relationship with the world powers since all hegemons exact their pound of flesh (read: sovereignty) from other nations – using tools of security alliance, currency of trade, say in foreign affairs, alignment in regional forums and other factors.

What stands out here, however, is the timing and promptness of Pakistan’s change in stance, which explains such reckless trading of its sovereignty.


Red Flag in Sri Lanka

Second, since 1945, the USD has remained the key currency of global trade. This development was driven by two factors: US emerged as the global hegemon and USD became the most stable international currency. In comparison, CNY remains a fragile currency due to China’s burgeoning debt crisis, opaque capital markets, fear of ‘middle-income crisis’, accusations of currency manipulation, and other factors.

Trade in CNY means congruent coupling of Chinese and Pakistani economies. This in turn means that the fragility in Chinese markets could seep into Pakistan’s already under-performing economy. This is how Pakistan is pushing itself towards trading its economic sovereignty.

Third, if the CPEC fails to deliver on its promises, Pakistan will be staring at a massive debt. Already there are fissures appearing on the economic feasibility of CPEC, not for Chinese but for the Pakistanis. If these fears come true, Pakistan might be headed the Sri Lanka way.

For instance, Chinese investment (debt financing) through CPEC has increased 34 percent from USD 46 billion in 2015 to USD 62 billion at present. The persistent concerns on transparency, coupled with the rapidly escalating debt, do not bode well on economic viability of the projects.

During the last decade, China invested in Sri Lankan ports of Colombo and Hambantota. However, Sri Lanka failed to service the debt and in its attempt to repay, the country gave a majority stake to Chinese Public Sector Enterprise (PSE) China Merchants Group for a 99-year lease.

The High-Stakes Trade-Off

The Chinese control of this strategic port is bound to influence the trade flows in the region. Any such mishap in CPEC will lead Pakistan to lose its strategic Gwadar Port to Chinese ownership – highlighting breach of its territorial sovereignty caused by economic recklessness.

Third, this moment marks the point of no return for Pakistan from China’s sphere of strategic influence. Pakistan is fully aware of the ramifications of this move. It is to be noted that in November last year, senior Pakistani officials themselves declined China’s request for trade in CNY saying that such a move would compromise its economic sovereignty.

The move to trade in CNY would also involve preparing Pakistan’s financial institutions to be able to take up such transactions. Such intertwining of economies may also restrict Pakistan’s ability to vote independently in regional and global forums. This means that Pakistan’s strategic independence can be at stake and could very well result in dilution of its sovereignty on matters of national importance.

The above mentioned ramifications reveal how Pakistan’s decision to conduct its trade with China in CNY could adversely impact its sovereignty – territorial, economic, foreign affairs and strategic posturing. Such trading of sovereignty is neither new to the world nor to Pakistan – but the key question is, will Pakistan’s trade of sovereignty unleash precarious geo-strategic concerns in the region?


(The writer is a Public Policy Specialist with NITI Aayog and can be reached @dhardevashish. The views and analysis expressed in the article do not reflect the views of NITI Aayog. This is an opinion piece and the views expressed above are the author's own. The Quint neither endorses nor is responsible for the same.)

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