China's Pakistan Corridor

In the Pakistani province of Balochistan, South Asia and central Asia bleed into the Middle East. Bordered by Afghanistan, Iran and the Persian Gulf, and well endowed with oil, gas, copper, gold and coal reserves, Balochistan is a rich prize that should have foreign investors battering at the gates. But for a half-century it has been the exclusive playground of the Pakistani government and its state-owned Chinese partners. China would prefer it to stay that way.

China is Pakistan's oldest military and political ally, but in the last two decades it is the economic component of the alliance that has taken center stage. Pakistan, and in particular Balochistan, is China's physical link to its sizable investments in Iranian gas, Afghan hydropower and Gulf oil. Explains Andrew Small, a fellow at the German Marshall Fund, the Sino-Pak relationship "matters more now, because of India's economic growth. Pakistan being a trade and energy corridor means that possible pipelines and projects [in Pakistan] have a strategic significance beyond the specific investments." Chinese control of Pakistan's commodities corridor can "bind India down in South Asia, restricting its capacity to operate elsewhere."

According to the Pakistani government, Chinese companies have poured at least $15 billion into Baloch projects: an oil refinery, copper and zinc mines and a deepwater port at Gwadar, in the Gulf of Oman. "They wanted Gwadar to be another Dubai," says Khurram Abbas, the port's managing director, "to capture the transit trade with countries that are landlocked, like Afghanistan, and to encourage transshipment trade from the Persian Gulf to East Africa."

China's Tianjin Zhongbei Harbor Engineering has invested $200 million to build the first three berths and plans to invest a total of $1.6 billion to expand the port in the future. But business at Gwadar has been slow. Though the three berths have the capacity to handle $2 billion worth of cargo a year, the port saw only $700 million in 2009. "The challenge," says Abbas, "is that Gwadar is not yet linked to the rest of the country. The government was supposed to provide road connectivity. Without roads there can be no commercial activity [in Balochistan]. And we need commercial activity, investors to set up factories around Gwadar, to get cargo for the port."

China is taking matters into its own hands, starting to build a highway from Gwadar to the capital of Balochistan, Quetta, on the Afghan border, where it will connect to Pakistan's national highway network, and from there to the Karakoram Highway that leads into China. China's Harbor Engineering Corps is also working on a new airport at Gwadar, due to open in 2013.

Infrastructure is not the only challenge that Chinese investors in Balochistan face. The province is a key battleground in the wars currently threatening Pakistan. Quetta is rumored to be hiding wanted leaders from the Afghan Taliban. Small towns in the Baloch heartland, meanwhile, are a launchpad for a decades-old separatist movement that capitalizes on populist resentment of federal agencies and foreign investment.

Chinese firms can usually weather these threats. Explains the German Marshall Fund's Small, "They are less concerned about security than the U.S. because they have faith in the Pakistani military's ability to look out for their interests, a level of faith that Chinese workers will get privileged levels of protection even amidst destabilizing [political] circumstances." Unsaid: China is willing to play in the bribery culture traditional to the area.

Moreover, China recruits local figures as managers. Muhammad Sanjrani, the managing director of China's Saindak copper mine in Chagai, Balochistan, is also the head of the local tribe, with historic control of the Chagai region, and has worked to sell the project to the populace.

Beijing is willing to play hardball to protect its position in Balochistan. That's a lesson learned the hard way for Tethyan Copper, a joint venture between Canada's Barrick Gold and Chile's Antofagasta. In 2006 Tethyan signed a deal to survey, and then develop, the Reko Diq reserve in Balochistan, estimated to hold $70 billion in copper and gold.

Though the provincial government holds a 25% stake in the venture, the deal was signed between the federal government and Tethyan's foreign execs, and no prominent tribal authorities are involved. As a result, the mine has been unusually unpopular, exacerbating threats to other foreign investments in the province, including China's highway project.

In January the Baloch government, struggling politically and looking to appease separatist hardliners, announced it would cancel Tethyan's license and force investors to absorb a $3 billion loss. Almost immediately the U.S. intervened, putting pressure on the Pakistani central government to dissuade Quetta from doing this. U.S. diplomats believe the sanctity of the Tethyan deal is essential to its efforts to encourage Western investment in Pakistan as a counterterror tool. (Further Reading: "Fixing Pakistan")

For China, however, American intervention was an alarm bell, confirming longstanding suspicions in Beijing that Pakistan's alliance with the U.S. in Afghanistan would come at the expense of China's relationship with the Pakistani military establishment and its exclusive access to Pakistan's wealth and strategic location.

But the confrontation between Pakistan's central government, responding to U.S. pressure, and a more intransigent provincial leadership also presented China with an opportunity. The giant Metallurgical Corp. of China, which controls the Chinese stake in the Saindak site, bid to take over the Reko Diq site from Tethyan, too.

Though the provincial and federal governments have yet to agree, MCC made a compelling case. In private meetings with Baloch leaders the Chinese representatives agreed to build a railroad and a power plant in Balochistan as well as to waive any requirements for sovereign guarantees. Says a frustrated William N. Center, the U.S. State Department's foreign commercial attaché in Pakistan, "These are terms that no private company could compete with."