Equilibrium

By Nathan Balis

The China-Pakistan Economic Corridor (CPEC) — the $62 billion flagship project of China’s Belt and Road Initiative (BRI) — entered its second phase late last year, dubbed CPEC 2.0. Designed to connect Pakistan’s Gwadar and Karachi ports to China’s Xinjiang Uyghur Autonomous Region, CPEC has been one of Beijing’s most ambitious geoeconomic undertakings. For China, it offers strategic access to the Arabian Sea; for Pakistan, a potential route out of economic stagnation. This analysis examines how the launch of CPEC 2.0 signals China’s continued commitment to the project despite Pakistan’s rising political instability, economic fragility, and internal resistance — all of which test the corridor’s long-term sustainability.

Historical Background:

Few bilateral relationships rival the strategic depth of China and Pakistan’s. Islamabad was among the first to recognize the People’s Republic of China and one of only two nations to stand by Beijing after the 1989 Tiananmen Square crackdown. The two have consistently backed each other’s positions — from Kashmir and Xinjiang to Taiwan and Tibet — forging a political alignment that laid the groundwork for CPEC’s birth in April 2015.

This relationship provided the foundation for CPEC’s inception, when Chinese President Xi Jinping unveiled his “1+4” vision for Pakistan, focusing on improving Gwadar Port, energy and transportation infrastructure, and industrial cooperation. These initiatives directly addressed Pakistan’s chronic energy shortages and sought to improve highway access to its ports, particularly from Pakistan’s underdeveloped western regions. Key achievements thus far have included the development and construction of Gwadar’s seaport and airport, over 8,000 megawatts of additional power capacity through multiple power plants, and an extensive road network spanning nearly 1,000 kilometers.

CPEC 1.0 and Its Strategic Logic

CPEC serves multiple strategic aims for China. First and foremost, it provides a shorter, land-based alternative to import oil from the Middle East via Gwadar Port, reducing China’s dependency on the Strait of Malacca — a vulnerable chokepoint that sees 80% of its energy imports and could be blockaded in a potential conflict with the U.S. or India. Known as the “Malacca Dilemma,” this dependency has long troubled Chinese strategists.

The corridor also advances China’s internal goals. Economic integration of the Xinjiang region via CPEC is seen as a soft power method to stabilize it and reduce separatist sentiments. Externally, CPEC enhances China’s commercial and naval reach into the Indian Ocean. It supports China’s broader String of Pearls strategy — building a network of commercial and military assets across the Indian Ocean to project power and secure sea lanes.

For Pakistan, CPEC has been marketed as an economic game-changer. It has improved infrastructure, addressed electricity shortages, created hundreds of thousands of jobs, and expanded regional connectivity with Central Asia. Yet concerns remain. Beijing has grown wary of the Pakistan Army’s increasing control over CPEC execution, which raises fears of militarized economic policy. Moreover, insurgents in the Pakistani province of Balochistan have attacked Chinese assets, viewing the project as neo-colonial and exploitative. Financially, Pakistan’s mounting debt burden, of which China is the largest bilateral creditor, has raised alarms. As of 2024, approximately 22% of Pakistan’s $131 billion external debt is owed to China, according to the IMF. Although both governments deny it, Pakistan’s financial dependence has fueled accusations of Chinese debt-trap diplomacy, where opaque loans and economic leverage provide Beijing with disproportionate strategic influence.

CPEC 2.0: New Goals, Same Stakes

Despite these challenges, China is doubling down. CPEC 2.0 marks a strategic pivot from basic infrastructure development to higher-value economic integration through:

–   Developing Special Economic Zones (SEZs) to boost manufacturing, exports, and attract foreign direct investment (FDI) into Pakistan.

–   Facilitating technology transfer to modernize Pakistan’s agricultural sector and increase value-added exports to China.

–   Expanding fiber-optic and digital infrastructure to link Pakistan to China’s Digital Silk Road.

–   Introducing public-private partnerships (PPPs) and local financing to reduce debt dependence on Chinese state loans.

This shift mirrors China’s evolving geoeconomic toolkit: rather than just building infrastructure, it now seeks to shape entire ecosystems of industrial and technological development. As of 2023, bilateral trade between China and Pakistan stood at $23 billion, with China as Pakistan’s largest trading partner and biggest source of imports — further deepening economic interdependence.

However, major questions remain. Pakistan’s political system, being plagued by military dominance and bureaucratic inefficiency, has historically struggled to manage complex reforms. Whether it can effectively oversee SEZs under CPEC 2.0 remains doubtful. Past efforts have faltered due to land disputes, bureaucratic gridlock, and lack of local buy-in. Likewise, the promise of genuine tech transfer often falls short in China’s BRI projects, raising doubts about the long-term industrial benefit for Pakistan.

Regional Implications

By committing to CPEC’s second phase, Beijing has signaled that it views the corridor as a critical geoeconomic opportunity with far-reaching regional implications:

1. Mitigating the Malacca Dilemma

China has thus far been unable to effectively solve its Malacca Dilemma, where rising tensions in Taiwan and the South China Sea have only emphasized the chokepoint’s importance. CPEC 2.0 demonstrates the premium Chinese strategists place on diversifying trade, military, and logistical routes through friendly territory.

CPEC’s significance is further elevated when compared to other faltering alternatives. While the China–Myanmar Economic Corridor (CMEC) once offered a similar path, Myanmar’s 2021 military coup and subsequent instability have slowed progress dramatically. In contrast, despite Pakistan’s volatility, CPEC now stands as China’s most viable westward corridor, offering strategic redundancy and trade security. It demonstrates the increasing importance the CCP places on solving the Malacca Dilemma and developing alternative economic networks.

2. Check on India

India views CPEC as a violation of its sovereignty, since parts of the corridor pass through Gilgit-Baltistan, a disputed region in Jammu and Kashmir. China’s persistent development in this area reinforces Pakistan’s territorial claims, undermines India’s position in bilateral and multilateral forums, and forces India to militarize its northern frontiers, draining strategic bandwidth.

Furthermore, China’s deepening stake in Pakistan’s economy gives Beijing a veto-like influence over Islamabad’s India policy. CPEC 2.0 thus emphasizes its function as a geopolitical buffer zone, constraining India’s freedom of maneuver both regionally and globally.

3. Countering the U.S. Indo-Pacific Strategy

CPEC is also China’s counterweight to the U.S. Indo-Pacific Strategy (IPS), the Quad alliance, and the newly announced India–Middle East–Europe Corridor (IMEC). China aims to promote a regional China-centric trade and logistics network that challenges the dominance of U.S.-backed trade corridors, while its Digital Silk Road initiatives divert countries from U.S.-led tech ecosystems.

Finally, the continuing development of Gwadar Port further raises U.S. concerns over the potential future logistics or dual-use naval base for the Chinese navy (PLAN). This would give China a strategic node in the Indian Ocean that would directly challenge the U.S. 5th Fleet based in Bahrain and Diego Garcia — particularly given its proximity to the Strait of Hormuz, another vital choke point of global shipping.

Conclusion

While CPEC has thus far exemplified the CCP’s geoeconomic strategy through the BRI, the launch of its second phase in 2024 underscores a renewed and evolving set of strategic objectives. Its renewed momentum quashes speculation of Chinese retreat and underscores Beijing’s strategic calculus in the region: to secure access to the Arabian Sea, check Indian influence, and counter the U.S.’s presence in the region.

CPEC has already delivered tangible economic gains for Pakistan — from power generation to port development — and shows no signs of slowing, despite mounting debt concerns and local unrest. In fact, China’s willingness to continue investing amid instability may reflect the very logic of its so-called debt-trap diplomacy: creating long-term political leverage through economic dependency.

Understanding China’s evolving relationship with Pakistan — and the deeper logic behind CPEC’s expansion — is essential for evaluating both regional dynamics and the future of geoeconomic competition across Asia.