The article looks at how Pakistan and China have strengthened cooperative ties in financial and banking sectors since the launch of CPEC, a project of Chinese President Xi Jinping’s visionary Belt and Road Initiative (BRI) that aims at enhancing regional and international connectivity, including joint ventures and partnerships in the financial areas.

Under the tag of CPEC, we have seen the construction side of CPEC; tower cranes, excavators and bulldozers moving around a construction sites, power lines stretching, delegates meeting officials, and journalists and commentators talking on media. Now, let’s have a look at the financial side of CPEC to know more about the economic spark and more encouraging outcomes achieved in the banking sector of China and Pakistan since the last few years.

Multiple reports show both the Chinese and Pakistani banks have played vital role in accomplishing the common goals about robust economic cooperation set by the political leaderships of both the countries since the launch of CPEC in 2015. China’s leading development financial institutions; BOC, ICBC, EXIM and CDB, have made “strategic deployments” to expand their businesses and supporting Chinese companies to scale up investment and cooperation in Pakistan. Such deployments have stimulated not only economic development but also have increased bilateral and multilateral financial cooperation between the public and private banks of two strategic cooperative partners. Pakistan’s SBP, HBL, UBL, Allied and UFONE have expanded diverse financial cooperation with Chinese partners that includes opening up of bank branches in Chinese cities, Urumqi and Beijing, currency agreement, and RMB transactions.

Since 2015, the leadership of China and Pakistan has made pledges, policies, projects and joint efforts for the realization of full potential of CPEC with a focus on development of power generation, infrastructure, Gwadar port, industrial parks, agriculture and ML1. All these initiatives have led to job creation and livelihoods for local community from Gilgit-Baltistan to Gwadar.

CPEC means more than just improvements in the infrastructure and energy situation, it means expansion of regional connectivity, planning and execution of joint investments in development projects, promotion of industrial cooperation and above all, transformation of Pakistan’s financial sector.  To achieve these goals, Chinese banks are seen not only supporting Pakistan’s economic managers in boosting development initiatives but also lowering their worries amid widening current account deficit and slipping foreign exchange reserves.  These facts indicate that leading Chinese financial organizations are contributing in Pakistan’s economy and making the country a crucial hub of China’s Belt and Road initiative (BRI).

CNY Transactions under CPEC

Under the CPEC paradigm, bilateral financial cooperation in banking sector also seems playing an important role in bridging the gap between the private sectors of both the countries. In this context, a recent achievement took place on October 2019, when Pak Telecom Mobile Limited through which HBL extended a bilateral Trade Finance in the Chinese Yuan (RMB/CNY) for the import of cellular network equipment through Huawei Technologies Co Ltd. This deal set a new precedent for expanding China Pakistan trade ties under the cooperation framework of CPEC. Official sources stated that the trade deal was part of one of the largest RMB/CNY contracts in the history of Pakistan, between Ufone and Huawei Technologies, and it would be a breakthrough in the banking industry of the country.

This new deal shows expansion of multi-faceted pragmatic cooperation between Ufone,Huawei and HBL. Ufone, the third largest mobile operator, and Huawei, Chinese technology giant promoting ICT industry’s technology, developing local ICT talent and ecosystem in Pakistan, and HBL, one of the largest bank with branches expanding in the Gwadar Free Zone and in China’s Urumqi, a city in Xinjiang, has benefitted from the financial cooperation with influx on Chinese investors as the CPEC/BRI gains momentum. Furthermore, in 2018, Habib Bank Limited (HBL) also obtained a loan of $196 million from China Development Bank (CDB) for various development projects under CPEC. Such financial and trade deals under this new mode of transaction have set a precedent for different sectors and corporations in both friendly countries-China and Pakistan-which plan to take their working relationship to the next level through this currency swap agreement.

Diversified Bank Cooperation

The expansion of banking sector cooperation, firstly, marks the confidence of the Chinese corporate sector in Pakistan’s economic situation, and secondly, lets China to help Pakistan to effectively reap the benefits of China’s economic prosperity. Through banking cooperation, Pakistan is learning from the Chinese banks' expertise in the small and medium enterprises sectors.

For example, Bank of China , one of the world’s largest banks with total assets of more than USD 3.0 trillion, formally launched its operations in Pakistan’s commercial hub in Karachi in November 07, 2017 to speed up the pace of trade and economic cooperation between the two countries. Since then, BOC has supported the financing of various projects in Pakistan for the socio-economic development.

Similarly, Allied Bank Limited (ABL) and Bank of China (BOC), Pakistan branch, also have signed a Memorandum of Understanding (MoU) to share the benefits of prosperity and progress. ABL is amongst the top financial institution in Pakistan with 1,350 branches across the country and having international presence in UAE, Bahrain and China. Under this MoU, both banks have entered agreement for collaboration with each other on RMB business, trade finance, treasury and corporate banking transactions. Officials from both sides say the agreement aims to encourage joint syndication and project financing of various projects in Pakistan.  ABL and BOCP’s baking cooperation between is not only instilling long term mutual business growth but also assisting in bonding of the two nations in banking and social sector.

Research data also shows People's Bank of China and the State Bank of Pakistan (SBP), the major monitory and financial policy makers of the two countries, have made arrangements for using Chinese Yuan, instead of the US dollar, for payments in bilateral trade as well as financing investment activity between Pakistan and China.

“Considering the recent local and global economic developments, particularly with the growing size of trade and investment with China under CPEC, the Bank foresees that yuan denominated trade with China will increase significantly and will yield long term benefits for both the countries, the SBP stated. The move led to further strengthening of cooperative ties in financial and banking sectors.

Besides signing cooperation MoUs, major banks have opened branched in capital cities of both countries. For example, ICBC, the largest commercial bank in China, also ranking No. 1 worldwide in terms of market capitalization, profits, customer deposits and brand value, opened its Karachi Branch and Islamabad Branch in 2011. Since then, ICBC has taken all steps to become a member of Pakistani community, standing as an outstanding foreign bank recognized by regulatory authority. ICBC branches have built up partnership with Chinese enterprises in Pakistan and have supported the local transportation, energy, telecommunications and other infrastructure projects. It is offering various financial services for companies and individuals, aiming to become a bridge and nexus for China-Pakistan economic.

Chinese Banks’ timely Support

Chinese banks are supporting Pakistan in the times of financial crunch. For instance, Pakistan obtained $4.01 billion from neighbouring China, constituting 36 percent of the total loans ($10.91 billion) in the fiscal year 2017-18, according to a report compiled by the Economic Affairs Division (EAD). Moreover, $2.2 billion were obtained from three Chinese commercial banks, China Development Bank, ICBC China, and Bank of China.  

Similarly a clean energy project- the Quaid-e-azam Solar Industrial Park in Bahawalpur, Punjab province, Pakistan, is financed and constructed by Chinese enterprises with a total investment of nearly 1.5 billion USD, from the CDB, the China EXIM Bank, and the Bank of Jiangsu and the Bohai Bank.

To promote the development of Special Economic Zones across the country and facilitate Chinese businesses in Pakistan, UBL, and Pakistan’s Best Bank for 2016, entered into a strategic partnership with China EXIM Bank in Pakistan in May 2017. Further, more, UBL and China Development Bank also executed an MOU of “Financing Cooperation” in February 2016 to support the CPEC initiative. And CBD finalized USD based credit facilities for UBL to support long term strategic projects in Pakistan under CPEC.

It is worth noting that China Development Bank is one of the strategic institutions of China and main conduits of CPEC investments in Pakistan. Both institution’s strengths and expertise in respective markets have focused on achieving the strategic objectives of the two governments while UBL and CDB strategic business collaboration is benefitting the larger community of Pakistan.

Another vibrant financial institution with remarkable contribution in CPEC is Pak China Investment Company Limited (PCICL), a Development Financial Institution (DFI) formed in 2007, with an Authorized Capital of USD 200 Million, under the initiatives taken by Government of Pakistan and Peoples Republic of China for promotion of trade, investment and economic growth of Pakistan. PCICL is a joint venture in which equity is equally contributed by Government of Pakistan and China Development Bank (one of the largest State Owned banks of Peoples Republic of China). Since the establishment, PCICCL has become a hub for investment activity and added remarkable value to sectors like Industry, Agriculture, Services, Information & Technology, Manufacturing, Real Estate and Infrastructure etc through a full range of Investment banking services in Pakistan.

Benefits in CNY settlement

The development of relationship in banking sector is playing a leading role in enabling the execution of CPEC, opening new avenues of business, trade and investment cooperation between the two countries. The banking sector’s relationship is further strengthening the China-Pakistan all-weather strategic cooperative partnership, and building closer China-Pakistan community of shared future in the new era. These new cooperation initiatives by the banking sectors of both countries will ensure that imports, exports and financing transactions can be denominated in CNY, wherein public and private sector enterprises (i.e. both Pakistanis and Chinese) will be free to choose CNY for bilateral trade & investment activities.

Moreover, banking and financial institution’s cooperation will help Pakistan to minimise flight of foreign exchange reserves and safeguard Rupee devaluation along with monetary tightening abridged gap between import and exports. Additionally, new financial contracts with Chinese banks will support Imran Government’s efforts to shorten swelling current account deficit as the import reduction measures are taking toll on export sector in addition to exerting pressure on already squeezing tax revenues. Also, banking sector cooperation will further revolutionize the China-Pakistan business landscapes, and contribute to the economic development on win-win basis, paving the way for economic prosperity and enriching the lives of people.

Last but not the least, facilitating CNY transactions in Pakistan will be catalyst for the internationalization of RMB through multilateral financial cooperation between the banks of China and Pakistan as Pakistani banks have strong presence in principal international markets including the UK, UAE, South and Central Asia, Africa and the Far East. Financial bonding with Pakistani banks could provide strategic platform for the Chinese banks to reach out to global markets and achieve the Chinese Dream of internationalizing the RMB as the BRI becomes a driving force of development.

The writer is Head of Media Dept., NUST

Copywrite Gwadar Pro, Oct. 31, 2019