The 60th anniversary of China-Pakistan relations was celebrated in 2011. Pakistan was the

third non-communist and the first Muslim country to recognize China in 1950. The

diplomatic relations between China and Pakistan were established in May 1951.The

friendship between China and Pakistan is all weather and everlasting. The relationship is

deeper than the oceans and higher than the mountains. The bolstering relations of China

and Pakistan have become a model for a friendly co-existence of developing neighboring

countries. China and Pakistan are enjoying strong bilateral cultural, economic and

military relationships. Both of the countries are striving together for promoting peace,

stability and economic prosperity in Asia.

In the past, China-Pakistan ties were mainly of

military and strategic importance. But now the economic relations of China-Pakistan are

strengthening specially after the conclusion of Free Trade Agreement (FTA) in 2007. In

this paper we would focus upon the economic relations of China and Pakistan. We also

used the granger causality test to understand the relationship between Chinese Inward

FDI and Economic Growth. We took the annual data from 1980 t0 2012. We found that

growth in China caused inward FDI. Furthermore, it has been discussed that what

Pakistan can learn from the miraculous economic progress and prosperity of China?

Keywords: Chinese economy; Flying Geese model; foreign direct investment; free trade

agreement; Pakistan’s economy.

The Islamic Republic of Pakistan came into being on 14th of August, 1947 and the

People’s Republic of China on 1st of October; 1949. Pakistan recognized China in 1950.

Pakistan was the third non-communist and the first Muslim country to recognize China.

Pakistan was also among those countries that opposed the United Nations resolution

recognizing China as an aggressor in the Korean War. The diplomatic relations between

China and Pakistan were established in May 1951. In 1961, the relations were further

strengthened when Pakistan voted for a bill concerning the restoration of China’s

legitimate rights in the UN.

In 1963, China-Pakistan signed the agreement for settling the border issues and for the

construction linking China’s Xinjian-Uygur autonomous region with the northern areas of

Pakistan. Chinese diplomatic assistance during the Indo-Pakistan War of 1965, further

solidified the China-Pakistan relationships (Kumar, 2006). Afterwards the state visits by

different leaders of both sides kept on cementing the mutual ties. Particularly, in 1996, a

state visit by Chinese President Jiang Zemin to Pakistan helped in establishing a

comprehensive friendship. In 2005, China and Pakistan signed a landmark Treaty of

Friendship and Co-operation (Aneja, 2006).

Close China-Pakistan ties have been mainly of military and strategic importance.

Pakistan always stands up to India against his hegemonies over the region, thus fulfilling

the key objective of China’s South Asia policy. As long as Pakistan and India are

preoccupied with one another China would be at peace on the Tibetan borders (Malik,

2001). China wants to focus more and more upon economic progress and prosperity by

avoiding the confrontations with India. Atul Kumar also expressed same kind of views. A

strong Pakistan is in the interest of China as it ensures that Indian dreams of regional

lordship will not go unchallenged (Kumar, 2006).

China-Pakistan political relations are extremely deep but economic relations are shallow.

China-Pakistan “all-weather” friendship requires the strengthening of the bilateral

economic relationship. In this regard China-Pakistan Free Trade Agreement is supposed

to be a stepping stone in augmenting the economic relations between China and Pakistan.

China-Pakistan Free Trade Agreement was signed on 24 November 2006 and entered into

force on 1 July 2007. The Agreement comprised of phased and gradual program of

elimination of tariff on substantially all bilateral trade. Through bilateral efforts, the

bilateral trade of goods between China and Pakistan is expected to reach 15 Billion US

Dollars in 2011. Pakistan’s trade deficit with China is expanding. Pakistan’s economy is

seriously struggling at the moment. In this paper we would also discuss that what

Pakistan can learn from the economic development of China since 1978.

2. Economic Indicators of China and the Policy of Opening up (1978)

After more than three decades of opening up China has achieved remarkable economic

growth. From 1980-2005, the annual GDP growth rate of China averaged 9.4%.World

Bank projected Chinese GDP growth of 8.5 percent for 2011. In 2009 The Exports of

China were $1.204 trillion. The exports commodities of China are electrical and other

machinery, including data processing equipment, apparel, textiles, iron and steel, optical

and medical equipment. In 2009 the Imports of China were $954.3 billion. The Imports

commodities of China are electrical and other machinery, oil and mineral fuels, optical

and medical equipment, metal ores, plastics, organic chemicals. The Labor force of China 

China-Pakistan Economic Relations

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is 813.5 million (2009 Estimated). The Labor force by occupation for agriculture is

39.5%, industry: 27.2% and services: 33.2% (2008 Estimated).

China is the largest and third largest country in the world in terms of population and area

respectively. Its population is1.3 billion and its area is 9.6 million square kilometers. In

1978, the Chinese government decided to move away from Soviet-style economic

policies and to gradually reform the economy towards free market principles. As the

architecture of Chinese economic reforms Deng Xiaoping said “It doesn’t matter if the

cat is black or white as long as it catches mice”. In 2008, foreign direct investment (FDI)

in China totaled $108312 million, making it the hottest destination for FDI. China opened

its borders for foreign firms in 1979 with the creation of Special Economic Zones in

Guangdong and Fujian Provinces with an objective to attain high-tech technology from

the advanced countries for improving the domestic capabilities. SEZs offered tremendous

advantages to foreign investors, including export and import duties exemptions for

equipment and instruments.

Pakistan is a sixth-largest population with an estimated population of 170 million.

Despite a weak economic base at the time of independence; Pakistan’s growth record is

quite acceptable. On average the growth rate of GDP has exceeded 4 percent. In 2009,

economy grew by a 4.1 percent. The agriculture contributes for 21 percent of GDP and is

the second largest sector of Pakistan’s economy. It also employs 45 percent of the

country’s total labor force. Manufacturing accounts for 18.5 percent of GDP and is the

third largest sector of economy. Pakistan is 4th largest producer of cotton. In terms of

foreign currency earnings and job creation, the textile and clothing industry has been the

main driver of the economy.

It is important to note that Pakistan’s industrial base at the time of independence was

almost non-existent. The manufacturing sector contributed only 1.83 percent of GDP.

Keeping this thing in context, it is praiseworthy that Pakistan has made major strides in

the industrialization process since its creation. For the period July to April 2010, Pakistan

received US$ 1.8 billion as a FDI as compared to US$ 3.2 billion in the same period of

2009.This represents a decline of 45 percent. The low FDI in Pakistan is attributed to two

main factors. Firstly, poor law and order situation in the country especially in the form of

terrorism events over last 10 years. Secondly, the lack of better infrastructure is also a

hurdle in attracting the foreign investors. Comparatively China is the success example of

FDI attraction because it provided better infrastructure and world’s best law and order

environment to the investors. In 2009, the exports and imports of Pakistan were US$

18.44 billion and US$ 28.47 billion respectively.

3.1 The Sixth Most Populous Country

Pakistan is the world’s sixth most populous country. According to Economic Survey of

Pakistan 2010, the estimated population of Pakistan is 169.9 million as at end

June 2009.The annual population growth rate of Pakistan is 2.05 percent. It is expected

that by 2050, Pakistan would become the fourth largest nation. With a median age of

around 20 years, Pakistan is a young country. Approximately 104 million Pakistanis are

below the age of 30 years. Total working age population is 121.01 million. The size of

the employed labor force is estimated at 52.71 million as of 2008-09. About 36% of

Pakistani population is residing in urban centers. Since 1950, it is stated that Pakistan’s

urban population has expanded over sevenfold.