Pakistan has refused to allow China to use its national currency, the Renminbi (RMB), in the Gwadar Free Zone under CPEC framework.

Gwadar Free Zone CPEC
By Government of Pakistan [Public domain], via Wikimedia Commons
According to The Express Tribune, Pakistani officials conveyed their position on the issue to the Chinese during a Senior Officials Meeting (SOM) held Monday in Islamabad, stating that such a move would compromise Pakistan’s economic sovereignty. The Senior Officials Meeting came just a day ahead of the seventh Joint Cooperation Committee meeting – CPEC highest decision-making authority.

China’s intent to introduce its national currency to the Gwadar Free Zone is part of its state-wide policy to internationalize the yuan and avoid the high risks that come with currency exchange if using the U.S. dollar or the Pakistani rupee.

The Express Tribune report cited the Ministry of Finance and the State Bank of Pakistan as being the main opponents to the proposition. The current bilateral Currency Swap Arrangement is set to expire in December, and both China and Pakistan have agreed that further adjustments must be made to the existing deal. The two countries agreed to give the agreement an unspecified extension, as well as increase the cap on the currency swap to $500 million.

Will this have an effect on CPEC?

As reported by the South China Morning Post, Du Youkang, head of Pakistan research at Fudan University, says that given the breadth of the CPEC plan, setbacks such as this will have very little impact on the realization of this enormous project.

He names CPEC, an infrastructure project meant to connect China’s Xinjiang region with Gwadar Port, as being the crown jewel in Beijing and Islamabad’s “all-weather friendship.” Referring to Pakistan’s refusal to accept the yuan, as well as its recent canceling of a $14 billion damn deal with China, he says that “it is unavoidable that differences will occur in a program of this scope.”

According to the Economic Times, informed sources said that the two sides have also appeared to have settled issues regarding the $8.5 billion Karachi-Lahore-Peshawar Railway Line, despite dropping the Karachi Circular Railway project from CPEC.

It seems that the sheer scope of the China-Pakistan Economic Corridor and the projects it encompasses prevents both countries from dwelling too much on canceled or unresolved issues. Pakistan pulling the plug on the construction of the Diamer-Bhasha dam seemingly had no impact on the way China handles other CPEC deals.

Pakistan might agree with the yuan on their own terms

Despite Pakistan’s immediate refusal to allow the yuan to be used in the Gwadar Free Zone, it seems that its decision might not be absolute.

According to a recent report by The Dawn, Pakistani officials have said that the issue of the yuan would be discussed again in order for an institutional agreement to be made. Stating that the issue would most likely be discussed at the CPEC Joint Cooperation Committee meeting, the report also said that the two sides are also expected to sign agreements on actively promoted power projects. The said CPEC Joint Cooperation Committee meeting is scheduled to take place Wednesday on Islamabad, where at least 150 high-level officials from both countries will be present.

Such a high profile meeting is bound to see the yuan issue heavily discussed, which should yield a very productive dialogue between China and Pakistan. According to the Express Tribune, Pakistan has already accepted the demand to establish the Customs Special Supervised Areas along the CPEC route in order to facilitate Chinese investments in Special Economic Zones.

With Pakistan working on the final draft of the Long-Term Plan for the CPEC (2014-2030), and a Pakistani senior government official stating the use of yuan in any part of Pakistan has to be on a reciprocal basis, there seems to be an empty slot intentionally left for this issue to develop.

We are yet to see how the JCC meeting will unfold and whether or not an agreement on the issue will be made. Finding common ground when it comes to the use of national currencies might pave way for pending or delayed CPEC deals to come through faster than predicted.