Pakistan and China on Wednesday pressed Afghanistan's Taliban authorities to act against terrorist groups threatening their security, during the 6th Pakistan-Afghanistan-China trilateral dialogue held in Kabul. In separate bilateral talks, the Chinese Foreign Minister emphasized the importance of security cooperation with Afghanistan for development, while Pakistan's Foreign Minister expressed disappointment over slow progress in counter-terrorism efforts.

Afghanistan promised economic cooperation and the potential extension of the China-Pakistan Economic Corridor (CPEC) to the landlocked country. Security concerns, however, dominated the agenda. Both Pakistan and China view Afghanistan-based terrorist groups, such as the Islamic State Khorasan (IS-K), Tehreek-i-Taliban Pakistan (TTP), and the East Turkestan Islamic Movement (ETIM), as serious threats to their stability. UN assessments indicate that Afghanistan has once again become a hub for these groups.

In a China-mediated trilateral meeting in May, Pakistan secured promises for closer coordination on security, while Beijing linked future economic projects, such as the Mes Aynak copper mine, to action against ETIM militants active near Xinjiang. Pakistan's Deputy Prime Minister and Foreign Minister, Ishaq Dar, told Afghanistan's Acting Foreign Minister Amir Khan Muttaqi that counter-terrorism commitments were not being honored and called for "concrete and verifiable measures" against the TTP and the Balochistan Liberation Army. The Afghan Foreign Minister assured Chinese Foreign Minister Wang Yi that Afghan soil would not be used against neighboring countries.

Market Signals

Sector Impacts and Opportunities: Security concerns are increasing operational costs and project risks for the infrastructure, energy, and logistics sectors in Pakistan and Afghanistan. Concurrently, opportunities may arise for companies in security technology and risk management.
Price Movements and Volatility: Persistent security concerns could lead to heightened market volatility in the region, necessitating careful risk assessment before investment decisions.
Competitor Positioning Changes: Chinese companies may gain access to new markets and transit routes through the extension of CPEC into Afghanistan, strengthening their strategic position in the region.

Stakeholder Impact

Winners: Chinese companies potentially gaining access to new markets via Afghanistan; Pakistani infrastructure and logistics firms that could benefit from CPEC expansion; security firms profiting from increased demand for security solutions.

Losers: Terrorist organizations facing increasing pressure; businesses operating in high-risk environments if security conditions do not significantly improve.

Action Timeline

Immediate: Assess investment opportunities in security infrastructure in Pakistan and Afghanistan; monitor concrete actions by the Taliban against terrorist groups.
Short-term: Develop phased investment strategies in CPEC projects, focusing on security aspects; conduct thorough due diligence on Afghan projects.
Long-term: Monitor the progress of CPEC's second phase and its potential extension into Afghanistan; observe Pakistan-Afghanistan bilateral relations regarding border security and counter-terrorism cooperation.

Risk Assessment

Regulatory Risks: Uncertainty surrounding Afghanistan's legal and regulatory framework poses risks for foreign investment.
Market Volatility: Ongoing security challenges and the potential for renewed instability in Afghanistan could increase market volatility in Pakistan and the wider region.
Geopolitical Tensions: India's stance on CPEC, which passes through disputed territory, remains a point of contention and adds another layer of geopolitical complexity.

Key Indicators

Signals for Market/Industry: The trilateral dialogue underscores the strategic alignment between Pakistan and China on regional security, with CPEC expansion serving as a key economic lever.
Leading Indicators and Data Points: The effectiveness of the Taliban in dismantling or restraining groups like TTP, BLA, ETIM, and Al-Qaeda, as well as the progress of CPEC's second phase and its security arrangements, should be monitored.

Regional Perspective

The trilateral dialogue highlights China's growing interest in Afghanistan's stability as a prerequisite for expanding the Belt and Road Initiative (BRI), particularly CPEC. Pakistan seeks to ensure that Afghan territory is not used for attacks within its borders, reflecting its deep security concerns. Afghanistan's authorities, in turn, are attempting to balance their economic needs with their security commitments.

Immediate Implications

What Happens Next: Pressure is expected to continue on the Taliban to enhance counter-terrorism efforts, with a focus on security cooperation with China and Pakistan.
Time-Sensitive Opportunities or Risks: Early investment opportunities may emerge for companies capable of offering integrated security solutions in the region, alongside risks associated with ongoing security uncertainties.

What to Watch

Leading Indicators to Monitor: The Taliban's effectiveness in counter-terrorism, progress in implementing CPEC projects in Afghanistan, and the evolution of Pakistan-Afghanistan relations.
Expected Next Developments: The region may see increased investment in security infrastructure, with a focus on securing transport and trade routes.
Key Upcoming Decision Points: Decisions by the Taliban on security cooperation and potential investment decisions by Chinese and Pakistani entities regarding CPEC expansion.

Analysis

The trilateral meeting signals a strong desire from Pakistan and China to achieve regional stability, with CPEC serving as a key driver. However, the success of these initiatives hinges significantly on the Taliban's ability to contain terrorist groups. Investors should proceed with caution, focusing on security and risk assessments before committing to any major investments in Afghanistan or adjacent regions.