Sep 26 - Oct 2, 20

The Chinese banking giant, Industrial and Commercial Bank of China (ICBC) has started its operations in Pakistan. The State Bank of Pakistan (SBP) has issued the banking license to ICBC as the scheduled bank with effect from August 18.

The opening of ICBC's branches in Karachi and Islamabad has also opened the first financial link between the two countries. A direct financial link was necessary in view of growing trade relation between the two states.

Bilateral trade reached $5.789 billion in last fiscal year 2010-11, with import from China rose to $4.144 billion but export to China remained at $1.645 billion.

The existing investment and trade relation between the two countries is expected to further enhance with the presence of ICBC in Pakistan.

ICBC is the largest state-owned bank in Asia and fourth-largest in the world offering a wide range of financial products including personal and corporate banking services, global services, e-banking, bank card and more. It is the world's biggest bank by market value and a leading financial player in China with a large customer base and multi-dimensional business structure. Over the past few years, ICBC is building its own team of international staff while growing its overseas presence. As of December 31, 2010, the ICBC had 16,227 offices and branches in China, besides, overseas banking services in more than 20 countries worldwide.

The ICBC has opened two branches in the country under a deal signed between the two countries in December 2010 during a visit to Pakistan by Chinese Premier Wen Jiabao.

The entry of ICBC, the world's biggest bank by market value, into the country's financial market is immensely important at a time when the western financial institutions are scaling back their presence in the south Asian country.

China is also a major investor in Pakistan though foreign investment in the country has witnessed a steady decline over the past few years.

Foreign investment in Pakistan fell 60.8 percent in July, the first month of current fiscal year 2011-12 to $61.9 million due to unstable security and deepening energy crisis.

Foreign direct investment in the country dropped 17.2 percent in July to $90.9 million from $109.8 million in the same period last year, while foreign portfolio investment fell 160.4 percent in July, according to the central bank. Major decline in portfolio investment was due to violence in Karachi, the country's commercial capital, where 340 people were killed only in July.

On the other hand, Chinese investments and projects in the south Asian country reached to $25 billion. China's public and private sector is currently involved in over 250 projects in Pakistan from mega to minor and from strategic to ordinary businesses.

With the opening of direct financial link, the bilateral trade volume is expected to improve at a time when the balance of trade is heavily against Pakistan. Local traders however believe that the country needs to bring down the cost of production since China is the market of low-cost products.

Presently, many Chinese firms are interested in making investments and establishing joint ventures with local companies. China's investment in the country has expanded from resources, home appliances to communications and finance. Presence of a Chinese bank in Pakistan will provide financial support to Chinese companies, which are exploring investment opportunities or engaged in infrastructure development and financial business in the country.

The country's troubled economy, which grew by 2.4 percent in last fiscal year 2010-11, has been relying on $11.3 billion loan agreed to with International Monetary Fund (IMF) since 2008. The surge in nonperforming loans (NPLs) poses a challenge for the country's banking industry.

The NPLs witnessed a rapid increase during last three years and almost doubled since calendar year 2007. The size of NPLs of Pakistani banks grew by Rs5.54 billion to Rs594.47 billion in the second quarter of this year. Deteriorating asset quality and high interest rates are likely to continue to hold back credit growth over the coming months. The country's foreign has reached to Rs9,550 billion after swelling to Rs3,050 billion in only two years.

The remittances from overseas Pakistanis rose to a record $11.2 billion in the last fiscal year that ended on June 30, an increase of 25.77 percent from the previous year.

The higher remittances saved the country to face current account deficit. The national saving rate increased to 13.8 per cent of gross domestic product (GDP) mainly due to increase in net factor income from abroad, according to the central bank.

Critics however say that saving rate is still much lower than a sound level that requires protecting the economy as well as financial system from vulnerability. Whatever is being saved in financial institutions, critics contend, is being invested in government papers that are non-productive and do not help the economy to perform better.

Local analysts believe that the entry of the ICBC would have a significant impact on the country's financial sector, which faces a challenging economic and business environment that has affected its growth.

China pledged its support for Pakistan after the United States announced last month that it would suspend $800 million worth of security aid to Islamabad. The U.S. has withheld almost a third of its annual $2.7 billion security assistance to Islamabad.

China not only pledged to take various measures to help salvage Pakistan from economic difficulties but also agreed to step up military cooperation with Islamabad, which is in a state of war with Islamist extremists.

Critics say that China has leveraged Pakistan's volatile relationship with US and India to maintain a strategic hedge against the superpower and a close competitor in the region.

In November 2006, Pakistan signed a Free Trade Agreement (FTA) with China in goods, investment, and services. With liberal incentives offered by the government, low cost labor and access to the huge markets of countries in the region, Pakistan offers unique opportunity to Chinese investors to invest in the strategically located country.

Haier, the China's largest home appliance-maker, has already entered the country with an initial investment of about $35 million to create a joint venture, called Haier Pakistan, with Ruba General Trading Company. The Haier-Ruba zone is the first overseas industrial zone established by China in the country's Punjab province. The project has been considerably delayed on the issue of sharing cost of land, as Haier-Ruba has refused to buy 4218 acres of land from its own pocket.

Similarly, Zhongshan Changhong Electric Co. Ltd, the second largest state-owned electronics manufacturer of China, is presently in talks with the Pakistani authorities for setting up an assembling plant in the country.