Why China's $70 billion infra investment in Pakistan has more to do with India

Indian Prime Minister Narendra Modi with Chinese President Xi Jinping

A fragile ceasefire between India and Pakistan has exposed China’s strategic tightrope—balancing its deep investments in Pakistan’s CPEC with growing trade ties to India, even as the India-backed IMEC emerges as a formidable counter to Beijing’s Belt and Road Initiative (BRI).

"China would always want to see Indian competitiveness kept in check. It has considerable stakes in Pakistan and will continue to be its all-weather friend. The BRI, strategic control of ports and access to West Asia and exercising control over India are far more important to them,” said M Govinda Rao, economist and member of the 14th Finance Commission.

Projected as the “New Silk Road”, the BRI is a mega connectivity project that connects China with Southeast Asia, Central Asia, Russia, and Europe.

A few days after the ceasefire was announced between India and Pakistan, Chinese defence stocks on May 13 tumbled by as much as 9 percent as investors recanted bets on an extended conflict between the nuclear-armed neighbours.

China had come out in support for Pakistan as the conflict raged with the Chinese Foreign Minister Wang Yi on May 10 reiterating his country’s support for Islamabad.

The statement did not come as a surprise and notably reconfirmed a widely-held notion that China remains Islamabad’s all-weather friend, and not due to defence ties alone.

It is as much linked to infrastructure and strategy, since Beijing wants to hold on to its massive investments, somewhere in the range of $60-70 billion so far, in the China-Pakistan Economic Corridor (CPEC), a cornerstone of its controversial BRI. This is especially due to the emergence of the India-involved alternative in the India-Middle East-Europe Economic Corridor (IMEC).

Interestingly, Prime Minister Narendra Modi was in Jeddah on April 22, when the deadly terror attack in Jammu and Kashmir’s Pahalgam later in the day led him to cut his visit short. Saudi Arabia is a key partner in the IMEC, which is widely seen as an alternative to China’s BRI.

CPEC’s importance to China

Sriparna Pathak, Professor of China Studies at OP Jindal Global University, said that for Beijing, CPEC is not an economic corridor rather a strategic one, especially in the face of India’s opposition to the BRI.

Introduced in 2013, CPEC was initially touted as the flagship project of China’s BRI, with Beijing generously bankrolling the corridor despite India viewing it as a violation of its territorial sovereignty, given New Delhi’s stance on Pakistan-occupied Kashmir (PoK).

“The CPEC aims to create a sea and land-based corridor connecting China's western region to the Arabian Sea through Pakistan and illegally occupied PoK. India always opposed CPEC and New Delhi is committed to taking back its territory, while the CPEC and its related infrastructure is essential for China's energy security, trade, economy and its strategic presence in the region,” said Amit Singh, Associate Professor for security studies in JNU.

When China’s enthusiasm and investments in CPEC started waning following repeated attacks on Chinese infrastructure and citizens by insurgents in Baluchistan province, the G-20 hosted by India in 2023 unveiled a viable competitor in IMEC.

“For all purposes, we know that the IMEC was launched at the G20 Summit in 2023 to counter the BRI, because it is particularly an India-US led alternative to the BRI, connecting India to Europe via the Middle East through rail, shipping and energy networks. The tensions between India and Pakistan could actually bolster IMEC’s appeal because the effectiveness of CPEC is now being questioned,” Pathak added.

The proposal for the IMEC was finalised on the sidelines of the G20 Summit in September 2023, in New Delhi. The agreement was signed by India, Saudi Arabia, the European Union, the United Arab Emirates (UAE), the US, and some other G20 partners.

To be sure, there are concerns over delays in IMEC given recent geopolitical tensions in the Middle East, especially since any progress largely hinges on the normalisation of relations between Israel and Saudi Arabia.

China, too, would not want a prolonged Indo-Pak war

While China is an unwavering ally to Pakistan, experts point out that even Beijing would not want an all-out war between the two nuclear-armed neighbours as it risks its investments in Islamabad as well as robust trade ties with India.

“A prolonged conflict between India and Pakistan disrupts economic interests of China too, since it has investments in the CPEC and is also a major trading partner to India,” Pathak said.

Sujit Kumar, Chief Economist, National Bank for Financing Infrastructure and Development (Nabfid), added that China would not have wanted the conflict in its neighbourhood to escalate since it is facing a soft slowdown in economic growth and unpredictable trade policies.

“Importantly, CPEC has been a key policy vehicle to connect China with the Middle West and European economies. With global supply chains shifting away from China, any conflict escalation in the neighbourhood risks unravelling their investments in CPEC and undermining the Chinese quest to diversify trade and influence in the region,” Kumar told Moneycontrol.

China has been India’s top import source nation for several years now, with the trade deficit climbing to $99.2 billion in fiscal 2024-25. Beijing, on the other hand, is Pakistan’s second largest export destination after the US.

Therefore, China’s dual interest owing to the presence of CPEC in Pakistan and its growing trade ties with India may explain why the country, unlike Azerbaijan and Turkey, did not come out in support of Islamabad as brazenly during the recent conflict.

Notably, while India is abuzz with boycott calls for Turkey and Azerbaijan posing a threat to tourism and trade, Pakistan’s dependence on Chinese weapons and arms, which were reportedly used during the latest border clash, is as high as 80 percent.

"Any serious escalation between India and Pakistan or any destruction to CPEC infrastructure will severely hurt China's strategic interest. A significant number of Chinese labourers are also present in Pakistan, working on building CPEC infrastructure. Therefore, their safety and security are also in Beijing’s mind during any such escalations between India and Pakistan,” said JNU’s Singh.

Following the attack in Pahalgam that claimed the lives of 26 tourists, India carried out a precision hit on terror camps located across Pakistan on May 7. Islamabad retaliated, and the two nuclear-armed neighbours remained in a military standoff until a fragile ceasefire was reached nearly four days later.

The contrarian view

Despite China’s stakes in the Pakistan-bound CPEC, Professor Harsh V Pant, Vice President, Studies and Foreign Policy, Observer Research Foundation (ORF), offers a contrarian view. A low-intensity conflict between India and Pakistan would favour Beijing as it hopes to undermine New Delhi’s rising economic prowess, he said.

“China has already assumed that its investments in CPEC are a sunk cost since it has actually become a problem for Beijing with all the attacks on Chinese investments and nationals in Pakistan. This whole brouhaha about CPEC has not gone anywhere. Economic investments did not matter even before the conflict between India and Pakistan. If you look at the last few years, nothing much has moved on CPEC; they have not invested any new money. The initial burst of CPEC has petered out,” Pant told Moneycontrol.

Though Professor Pathak agreed that Chinese investments in the BRI’s Pakistan leg is a “sunk cost”, she says that a rollback on CPEC would look like Beijing is giving in to Indian opposition, and that would only help IMEC’s case.

“The BRI is Xi Jinping’s pet project, so while China is very subtly holding back some of its loans and commitments, it will never officially withdraw from the CPEC. It may be an entirely sunken cost, but that sort of cost is just really not to revive Pakistan’s economy; it is a strategic positioning against India,” Pathak said.