CPEC Phase II marks a transition from infrastructure connectivity to industrial embeddedness, through which China could acquire longer-term influence over Pakistan’s manufacturing base, technology choices and supply-chain orientation.

The Long-Term Plan for the China–Pakistan Economic Corridor (CPEC) (2017–2030), released in December 2017, envisaged a shift beyond the early harvest phase of roads, energy and Gwadar-linked infrastructure towards industrial cooperation, SEZs (Special Economic Zones), agriculture and socio-economic development.[1] Pakistan’s Board of Investment (BoI), a dedicated Project Management Unit for CPEC industrial cooperation, has been operating since 2019.[2]

On 16 January 2026, the BoI announced that the number of approved SEZs under CPEC Phase II had increased from 7 to 44, including 37 newly notified zones. The briefing placed SEZ-led industrialisation and Pakistan–China business-to-business cooperation at the centre of the upgraded CPEC framework. The briefing linked CPEC 2.0 with Pakistan’s ‘Uraan Pakistan’ 5Es framework—Exports, E-Pakistan (digital economy, IT, connectivity and digital governance), Equity and Empowerment, and Energy and Infrastructure, and Environment. It also flagged 2026 as a year of expanded investment outreach, as Pakistan and China plan to leverage the momentum of marking 75 years of diplomatic relations.[3]

The movement from Phase I to Phase II has been slower than expected. The reasons included Pakistan’s worsening power-sector liabilities, broader macroeconomic stress, investor-service gaps within SEZs, and recurring attacks on Chinese personnel, all of which made Beijing and Islamabad more cautious about shifting from construction-led projects to deeper industrial integration. Only in September 2025 did Pakistan and China formally re-launch Phase II with renewed political emphasis.

The significance of the January 2026 announcement lies not merely in the numerical expansion of SEZs, but in the deeper strategic shift it reflects. CPEC Phase II marks a transition from infrastructure connectivity to industrial embeddedness, through which China could acquire longer-term influence over Pakistan’s manufacturing base, technology choices and supply-chain orientation. Phase I of CPEC was centred on roads, energy projects and Gwadar-linked connectivity. Phase II seeks to build industrial clusters, attract anchor firms and integrate Pakistan more closely into China-linked production networks. If even a limited number of these zones become viable, CPEC will no longer be just a transport and energy corridor; it will evolve into an industrial ecosystem.

From Infrastructure to Industrial Embeddedness

CPEC was launched as a flagship Belt and Road corridor to link China’s Xinjiang to the Arabian Sea via Pakistan. Over time, it has been packaged as a roughly US$ 70 billion portfolio.[4] In practice, its first phase concentrated heavily on energy generation, transport infrastructure and port-linked connectivity. These projects helped address some of Pakistan’s electricity shortages and logistical constraints. Still, they did not resolve the country’s deeper structural weaknesses, such as low export competitiveness, weak industrial upgrading and persistent foreign-exchange stress.[5] That is precisely the gap that Phase II now claims it will address.

Phase I also left behind significant financial liabilities. Pakistan’s power sector became weighed down by fixed capacity payments, transmission losses, poor recoveries and circular debt. Dawn reported in May 2024 that circular debt in the power sector had crossed Rs 2.636 trillion.[6] National Electric Power Regulatory Authority’s State of Industry Report 2024 further noted that a recovery rate of only 92.44 per cent added Rs 314.51 billion to circular debt during FY 2023–24, while excessive transmission and distribution losses added another Rs 276 billion.[7] These figures matter for Phase II because industrial zones require predictable and affordable electricity.

A major share of CPEC Phase I was concentrated in power projects built on Independent Power Producer (IPP)-style contracts that guaranteed returns through capacity payments. As a result, Pakistan had to keep paying producers even when electricity demand remained low. Since many of these payments were dollar-linked, rupee depreciation made the burden even heavier in local currency terms, pushing up tariffs or forcing the government to borrow and subsidise the system. Although Islamabad is now re-negotiating some IPP contracts to reduce this burden, the immediate relief is likely to remain modest unless it also addresses payments tied to state-owned and Chinese-backed power projects.

These constraints intersect with Pakistan’s export problem, which is central to the Phase II pitch. World Bank data shows Pakistan’s GDP at about US$ 371.57 billion in 2024, while exports of goods and services were around US$ 40.2 billion, a weak ratio by regional standards. Islamabad, therefore, presents SEZs as instruments to expand manufacturing, jobs, tax revenue and foreign exchange. Yet exports will not rise through zones alone without broader reforms to customs efficiency, port operations and ease of doing business.[8]

The strategic significance of SEZs lies in the kind of dependence they can generate over time. Many actors can........

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