The Yuan: China’s New Strategic Tool in Pakistan

19 Jan, 2018    ·   5421

Air Cmde (Retd) Prashant Dikshit argues that China is steadily employing the Yuan as a strategic tool in Pakistan and makes projections regarding potential implications

In 2009, China launched a pilot project to use the Yuan (China's official currency and economic symbol) for cross-border settlements. Since then, there have been purposeful campaigns in this direction. The scheme was then developed into a full-fledged framework the very next year, and now, several Chinese companies conduct their business transactions in Yuan with their partners in Hong Kong and some ASEAN countries. Today, emboldened by its growing global economic clout Beijing is keen to push the Yuan forward.

Flaunting currency is not a mere economic move. It becomes a strategic manoeuvre when economics is applied to tilt the balance of power. Having learnt from its experiences in Southeast Asia and in the underdeveloped regions in the African continent, China has begun practicing this strategy in Pakistan. Among other things, it has asked the government of Pakistan to introduce the Yuan as a legal tender in the Gwadar Port Free Zone. Pakistan clearly demonstrated its deep rooted signs of discomfort with the proposal. The government balked at China's intention and rejected it outright. Pakistan viewed China's push for the Yuan as an infringement of its sovereignty. The reality is that this is about good risk control. Professions of "brotherly love" are all very well, but Pakistan wants to avoid another Venezuela.

Seemingly to emphasise its freedom, Islamabad said it will finance the Diamer-Bhasha dam itself, calling China's offer to construct, operate and maintain the project unacceptable. The dam was an important component of the much touted China Pakistan Economic Corridor (CPEC) project. There were economic issues as well, namely the high interest rate. Economists have claimed that “Pakistan manages the rupee more closely than China acts to stabilize the Yuan.” However, Beijing succeeded in ensuring the use of the Yuan as the bilateral trade settlement currency between China and Pakistan. As Pakistan's Minister for Planning and Development, Ahsan Iqbal, pointed out, this implies that the “US dollar may be replaced by Chinese Yuan in China-Pakistan trade.”
Pakistan watchers claim that the country's elite are seemingly not too keen to either deal in the Chinese currency or to let cheap Chinese goods flooding Pakistani markets and that they are resisting all attempts at imposing Chinese economics in their way of life. The said elites essentially belong to families of military officers and very senior members of the political class and civil servants whose kin are beneficiaries of the US system. On the other hand, the use of the Yuan in informal trade is already underway, especially in Balochistan province, where the China-developed Gwadar port is now operational. With reports emerging of China developing Jiwani as a military port - which Beijing has denied so far - along with nearly 20 high value projects under development, the day is not far when the Yuan will emerge as the informal legal tender all over Pakistan. Meanwhile, Islamabad is so deeply embroiled in the CPEC project that it cannot openly move against the Yuan for fear of annoying their Chinese masters.

In a November 2017 article titled 'Khush Hal Balochistan or Khush Hal China?' (A Prosperous Balochistan or A Prosperous China?), Mir Mohammad Ali Talpur, an eminent figure from the Baloch community outlined the cascading impact. He argued that “Gwadar Port is now, like Hambantota, a Chinese port what more will be taken of the resources and land that has been hocked in Balochistan, as Gwadar Port was, by Pakistan will only become apparent as Pakistan defaults on the loans it is so greedily devouring today;” adding that trade at the Khunjerab border in the north was floundering as "only Chinese transporters are allowed to ferry goods," and that China was raking in 91 per cent of the revenue generated via Gwadar port.

An attendant issue is the role of the Pakistan Army. Grapevine in Pakistan informs that to capitalise on the weak central government in Islamabad after the unceremonious exit of former Prime Minister Nawaz Sharif, the Pakistani military is extremely keen to control all projects linked with CPEC to replenish the likely loss of revenue when the US aid to Pakistan dries out. It would be then that the fault lines in Pakistan’s polity will clearly emerge on the surface, will undoubtedly lead to internal trouble.

The other related ramification would be the removal of the US yoke over Pakistan’s military, which used to control its behaviour. It has also been argued that the operations of the coalition forces in Afghanistan would be affected if the Pakistan Army chooses to work at counter purposes. Meanwhile, despite assurances by Pakistan’s army chief to the country’s senate that relations with India have to be improved, there is no likelihood of a change. In fact, there are graver prospects of Pakistan flaring up turmoil along the Indian border essentially to divert attention from its own actions within the country. Indications are bound to come in shortly and India must remain alert.