Finally, at perhaps the subtlest end of China’s geoeconomic spectrum lies the expanding role of the renminbi as a regional reserve currency across Southest Asia. As the RMB’s footprint in the region grows, Beijing will inherit many of the same perks that have heretofore translated the dollar’s reserve status into strategic influence for the United States. Vietnam, for instance, has expressed a willingness to work with China in expanding the current scale of currency swap and settlement agreements in order to “help advance liberalization and facilitation of trade and investment”—in other words, to further the renminbi’s continued globalization.191 Direct trading between the Singapore dollar and renminbi was introduced in 2013, reinforcing Singapore’s role as an offshore trading center and further internationalizing the Chinese yuan. Beijing also granted Singapore-based investors an $8.2 billion investment quota to allow those holding renminbi to invest in Chinese stocks, bonds, and money market instruments.192
In many instances, Chinese geoeconomic coercion has proven costly but effective—the Philippines is one clear example. In other cases, China has merely signaled to its neighbors the costs of risking geopolitical daylight between it and them, making those governments less inclined to act in ways that would run counter to China’s strategic objectives; Cambodia, Vietnam, Myanmar, and Malaysia are prime cases of this. However, in some instances, even where it has achieved short-term objectives, China’s economic pressure has reinforced the longer-term resolve of governments, such as those in Manila and Hanoi, to act in ways far less conducive to Beijing’s underlying strategic objectives. At bottom, though, China does not perceive self-defeating costs to this geoeconomic coercion, and until this changes, China is likely to persist.
Pakistan and India: China-Pakistan-India Triangular Relations and the Growing Role of Geoeconomics
When it comes to China’s current relationship with Pakistan and India, the old story is still the dominant one—China-Pakistan relations can only be understood within the context of each’s relationship with India.193 In 1950, Pakistan became one of the first countries to end official diplomatic relations with Taiwan, initiating the start of an enduring “all-weather friendship” between China and Pakistan. By contrast, the “pendulum” of China’s relations with India has “swung from friendship in the 1950s to confrontation that escalated in the border war of 1962 to various forms of conflict and cooperation in the 1990s” that continue today.194
While the familiar refrain of triangular relations between India, Pakistan, and China has endured across the last half century, it has evolved in substantial ways. In part it has grown deeper, with more complex interactions and interests. China and Pakistan have long valued each other as a strategic hedge against India.195 On rare occasions, each has looked to New Delhi as a means of gaining tactical leverage vis-à-vis the other. But as India has graduated into the ranks of an aspiring global power, New Delhi has evolved from an occasional hedge or foil in this triangle into a full and direct participant in its own right.196
As this triangle has grown deeper and more complex, it has also come to rely more on geoeconomic strategies. Pinpointing exactly why geoeconomics has become a preferred medium of influence among these three countries is difficult, but three factors stand out. For starters, Chinese leaders well appreciate that if China is to expand its influence vis-à-vis India or Pakistan without escalating military tensions or regional rivalries between them (inevitably drawing in the United States), much of what they have at their disposal to accomplish this task is geoeconomic in nature.197 Historically, Beijing has relied on military influence in its relations with Pakistan and, dating back to the U.S. embargo on weapons to Pakistan in 1965, China has played a major role in building up Pakistan’s defense capabilities by supplying arms factories and weapons systems.198 But Beijing has come to understand that, unlike supplying fifty JF-17 fighter jets to Pakistan, initiating a currency swap agreement between the People’s Bank of China and the State Bank of Pakistan is less likely to provoke a security response from the United States or India.199
Another reason behind China’s relatively greater focus on geoeconomic ties with both countries is that after more than a decade of strong growth averages and global ambitions, India has become too economically and politically valuable to China to risk intensifying tensions. Indeed, many experts expect that India will outpace China in real growth sometime in 2016.200 Given the massive (and growing) economic footprints of both countries, cooperation between China and India also offers both sides a potentially potent means of challenging U.S. prerogatives. The point is not lost on either New Delhi or Beijing, surfacing, for example, in each side’s commitment to the BRICS process, a largely geoeconomic project for all involved.201
A third reason China is turning to geoeconomics in its relationship with Pakistan may have to do with limitations to its more traditional military means. Put plainly, the United States has cornered the military relationship with Pakistan in the past fifteen years.202 Notwithstanding China’s history of supplying military technology and expertise to Pakistan, China’s military contribution is overshadowed by that of the United States since 9/11. “The immediate aftermath of 9/11 saw US-Pakistan relations grow dramatically as they collaborated in the war on terror,” explains Rajshree Jetly, of the Institute of South Asian Studies.203 Washington designated Pakistan as a major non-NATO ally and sent it massive economic and military aid as a front-line state in the war on terror. Though China is Pakistan’s primary supplier of sophisticated military technology from missiles, to combat aircraft and radar equipment, to submarines, it cannot match U.S. military aid levels, which totaled $15.8 billion from 2002 to 2012.204 Even if the diplomatic returns to these investments have not been what the United States and NATO have hoped, these military ties between Washington and Islamabad have been such that China is likely to gain more strategic influence in Islamabad through geoeconomic means.
There is a more fundamental motivation in China’s geopolitical calculus with both countries. Beijing’s dealings with Pakistan and India seem increasingly motivated by a silent fourth party in this strategic triangle: the United States. Beijing’s foreign policy choices regarding Pakistan draw substantially from the fact that Pakistan is an enduring serious problem for U.S. foreign policy. For China, having strong ties with one of the Americans’ greatest geopolitical headaches is itself a considerable source of leverage over the United States. To be sure, China and the United States have substantial convergence in their interests in Pakistan, and at least over the past decade China has been urging Pakistan to be more restrained in its relationship with India.205 But the point here goes deeper. However aligned China’s interests and constructive its actions in Pakistan from the standpoint of the United States, the fact remains that Pakistan needs China far more than the reverse, and so long as Pakistan remains one of the world’s most skilled countries at causing problems for the United States, China’s significant leverage over Islamabad marks an important if indirect source of leverage for Beijing vis-à-vis the United States.206
There are recent examples of Beijing’s long-standing readiness to supply a wide array of strategic options to Pakistan, especially when Pakistan is acting contrary to U.S. and Indian interests. In 2011, when Osama bin Laden was captured and killed, Chinese officials responded by expediting a deal to sell Pakistan fifty more J-10 advanced fighter jets; the United States, in contrast, “repeatedly delayed delivery of F-16s to Pakistan, and insisted that they not be used against India.”207 Not long after this expedited weapons deal with China, reports surfaced that the Pakistani military allowed the Chinese access to the U.S. stealth helicopter that crashed and was abandoned during the raid on bin Laden’s compound in Abbottabad.208
China’s interest in Pakistan as an indirect hedge against the United States, while far from new, is heightened by the fact that India and the United States have been steadily transforming their relationship since 2001. On his 2014 visit to New Delhi, U.S. secretary of defense Chuck Hagel qua
ntified the expanding U.S.-Indian partnership, noting, “Since 2008, over $9 billion in defense contracts have been signed between the United States and India, compared with less than $500 million for all the years prior.”209 In the last decade, the United States has dispensed with its long-standing policy of parity in its dealings with India and Pakistan, seen most clearly in Washington’s 2010 decision to formally back India’s bid for a permanent seat on the UN Security Council. The unqualified U.S. support for India’s emergence as a powerful democracy—one that could help to limit the negative consequences of the rise of Chinese power—now adds new stakes and complexities to triangular relations among neighbors India, China, and Pakistan.210
Chinese anxieties at the warming ties between India and Washington surfaced acutely in May 2013 when Chinese premier Li, shortly after taking office, made a visit to India his first trip outside of China. In press coverage of the Li trip, China did little to hide its concerns. “We would not like to see India become a tool of other major countries, especially the U.S., to counterbalance or check or contain China,” Hu Shisheng, an India specialist at CICIR, a Chinese-government-backed think tank in Beijing explained at the time. “We want, through closer relations, to support New Delhi’s policy that maintains equal distance. It’s not realistic to expect India to be closer to one country than the other.” Premier Li’s trip was itself a display of Chinese geoeconomic power. Li, traveling with executives from forty-one Chinese companies, called on the two countries to do more business together instead of relying on others for development. “With a long border and extensive common interests, China and India should not seek cooperation from afar while neglecting the partner close by,” he said.211
Finally, leading with geoeconomics in its approach to India and Pakistan may be intuitive for China not simply because it is the best available medium for influence in present circumstances but because, once again, it is an area where Beijing has plenty to work with. China’s asymmetric trade relations (China is the largest trading partner for both India and Pakistan), heavy assistance levels in the case of Pakistan, and sporadic investments in the region suggest that China has the potential to exercise geoeconomic leverage in its dealings with both countries.
As for how China actually exercises this leverage, some of its geoeconomic attempts are straightforward (and indeed often constructive, from the standpoint of U.S. interests). In March 2012, for instance, the Party chairman of China’s Xinjiang province decried that extremist groups in the province have a “thousand and one links” with Taliban forces in Pakistan.212 Despite Pakistan’s best efforts to convince Beijing that it would not allow extremism to be exported across its borders, a few weeks later China withdrew promised financing for a gas pipeline from Iran to Pakistan, signaling Beijing’s displeasure.213
More often, though, China prefers incentives in its dealings with Islamabad. The China-Pakistan Economic Corridor marks one of Beijing’s most ambitious efforts to keep Pakistan within China’s sphere of influence. With a total investment of $46 billion, it is a centerpiece of China’s New Silk Road initiative (also known in China as the “Belt and Road” initiative) and what Pakistani prime minister Nawaz Sharif calls “an example of the very close friendship between the two countries.”214 Other Pakistani officials have gone further, hailing the initiative as “the game changer for the entire region.”215 As part of the agreement, Beijing has promised to enhance transportation and trade by constructing an airport at the Chinese-managed port of Gwadar, as well as renovating roads between Lahore and Karachi and upgrading the region’s rail system. Other longer-term projects include building a new nuclear power plant near Karachi and developing Gwadar as a major international oil port between the Middle East and East Asia, as well as specialized economic zones modeled after China’s Shanghai free trade zone. The planned corridor will originate at Gwadar and pass through to the Karakoram Highway in Pakistan before going to the Pakistan-China border and on to Urumqi and western China.216 The Chinese government estimates that, upon completion, more than one-quarter of China’s foreign trade will travel through the corridor.217
It is an example of how Chinese geoeconomic leverage, even used constructively, is leverage all the same. Built by China, the Gwadar port, intended to be “a nexus between Pakistan, Iran, China and Central Asian States,” will be under the control of the China Overseas Ports Holding Company, ensuring that the economic corridor’s expansive blueprint will remain firmly within China’s sphere of influence.218 Indian security officials, for their part, view the plan with suspicion, “fearing China wants to increase its economic influence in South Asia and use Gwadar as one of a string of Chinese-financed ports in the region, where [China’s] navy could seek shelter and supplies as it expands operations in the Indian Ocean.”219
And just as with much of China’s infrastructure investment in Southeast Asia, another aim of China’s New Silk Road initiative is to mitigate China’s dependence on maritime trade routes that remain under the control of the U.S. Navy. In fact, part of Beijing’s diversification strategy is to find new ways to link land and maritime routes, bypassing the South China Sea choke points and minimizing the distance of any single maritime leg of Chinese shipping.220 The China-Pakistan Economic Corridor could prove helpful, allowing some Chinese goods to travel overland to Pakistan before embarking for Europe at the Chinese-constructed port at Gwadar.
Other large-scale energy projects by China in Pakistan tell a similar story. In 2013, China agreed to build two 1,100-megawatt nuclear power plants for Pakistan in Karachi under a $9 billion deal, financed largely through a concessional loan from China. In October 2015, following a summer heat wave that claimed around 2,000 Pakistani lives, China announced that it would construct a 2,000 km power line from Xinjiang province to Lahore by 2020 to support Pakistan’s overburdened power grid.221 Pakistani government officials have committed to improve security in areas where it is seeking Chinese investment—a diplomatic win for Chinese leaders increasingly unnerved by restive provinces along the China-Pakistan border. “We’ve always cooperated with them on security,” one official said. “The success of the Economic Corridor depends on stability.”222
But the U.S. government sees it differently. As Pakistan expert Daniel Markey summarized the reaction in Washington, “The Chinese have announced plans to finance two new nuclear reactors in Pakistan. The move has rankled U.S. policy makers who consider it a violation of China’s obligations to the Nuclear Suppliers Group.”223 Especially given Pakistan’s history of proliferation, the United States has, what journalist Pir Zubair Shah described as, “serious concerns over this cooperation.”224
Beyond the sort of strategic investments seen in China’s New Silk Road vision, China’s geoeconomic sway with Pakistan also tends to show itself in the breach—in how China responds to not-infrequent crisis moments in Pakistan. Compare Beijing’s financial backing for Pakistan in 1996 to that it provided in 2008. In 1996, China offered $500 million in balance-of-payments support, pulling Pakistan back from the brink of default. Javed Burki, Pakistan’s then finance minister, recalled how simple the fix was back then: he simply flew to Beijing to ask for the money. But that time has passed, for “China is no longer inclined to grant cash outright without structural reforms from the receiving government,” he said.225 By 2008, Pakistan again found itself verging on default. With the United States and other nations preoccupied by the global financial crisis, and Saudi Arabia, another traditional ally for Islamabad, refusing to offer oil concessions, China was again seen as the last port of call before the IMF. Despite press accounts noting how “accepting a rescue package from the fund would be seen as humiliating for Mr. Zardari’s government,” which had been in office less than a year at that point, Chinese officials this time largely did not oblige, giving Pakistan only $500 million and sending Islamabad instead to the IMF for the remaining $7.5 billion it needed.
A third variant of China’s geoeconomic displays vis-à-vis these two countries tends to aim
more at India than Pakistan and is simply about undermining Indian political will when it comes to territorial disputes still simmering along the Sino-Indian border. In 2009, China blocked approximately $3 billion in multilateral aid to India amid tensions surrounding Arunachal Pradesh, a region currently governed by India but claimed by China.226 The episode does not bode well for what the United States and others can expect as China gains the influence it is seeking in multilateral organizations such as the IMF and the China-led Asian Infrastructure Investment Bank: should future initiatives in these institutions infringe on what Beijing sees as its core national interests, there will likely be geoeconomic consequences.227
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