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India-China: Hype & Reality-Part I

As appeared in Shorn of the euphoria and the wishful-thinking usual on such occasions, the net results of Chinese President Hu Jintao’s visit to India (New Delhi, Agra and Mumbai) from November 20 to 23,2006,could be categorised under three heads— positive, hopefully positive and disturbingly negative.

2. The positive result, as in the past, relates to the steadily strengthening bilateral economic relations, despite continuing differences on the border dispute between the two countries. To understand the significance of the bilateral economic relations, they need to be examined under three heads—bilateral trade, bilateral construction contract flows and bilateral investment flows. The increase in bilateral trade has been spectacular and that in contract flows modest. The increase in investment flows has been poor with more investments flowing from India to China than the other way round.

3. The spectacular increase in bilateral trade would be evident from the following: In 2002, the total value of the bilateral trade was US $ five billion. By the end of 2005, it went up to US $ 18.7 billion. This year, it is expected to cross US $ 20 billion, two years ahead of the target date of 2008 set by the two countries during the visit of Chinese Prime Minister Mr. Wen Jiabao to India in April 2005. China has already replaced in 2003 Japan as India’s leading trade partner in this region and is expected to replace the US as India’s most important trade partner in another three years. Indo-US bilateral trade presently amounts to US $ 30 billion. Statistics from China’s customs authorities indicate that Sino-Indian trade in the first seven months of 2006 reached US$13.6 billion, up 27% as compared to the same period of 2005.

4. Indian statistics show a slightly higher figure. According to the statistics of the ASSOCHEM, a reputed Indian trade organisation, during the first six months of 2006, the value of Indian exports to China was estimated at US $ 6.2 billion and the Indian imports from China at US $ 7.45 billion. According to XU CHANGWEN, Director of the Asian and African Studies Department of the Chinese Academy of International Trade and Economic Cooperation, Ministry of Commerce, during the five years from 2000 to 2004, Sino-Indian bilateral trade grew at an annual rate of 46 per cent, surpassing the 26.7 per cent of China’s total foreign trade growth over the same period and India’s 14 per cent.

5. Encouraged by this dramatic growth rate, the two countries, during the visit of Mr.Hu, fixed a fresh target of US $ 40 billion to be achieved by 2010. Would the two countries be able to maintain the present growth rate of the bilateral trade and reach the target in time, if not ahead of schedule? In order to be able to seek an answer to this question, one has to keep in mind two factors, which dominate the bilateral trade at present. The first is the overwhelming dominance of iron ore in China’s imports from India and the second is the dominance of manufactured goods—particularly electronic goods— in India’s imports from China.

6. The dramatic increase in Indo-Chinese trade in recent years has coincided with two important changes in the economic landscape of the two countries: First, the rapid depletion of China’s iron ore reserves thereby making its front-running steel industry dependent on imports to meet the growing demand for steel of its construction and defence industries. The second, the liberalisation of the imports of consumer goods and reduction of import duties by the Government of India and the increase in the standard of living of the Indian middle class, which has created a growing demand for consumer goods of foreign design.

7. Iron ore exports constitute over 50 per cent of India’s exports to China. The iron ore produced in China is not sufficient to meet the needs of its steel industries. Moreover, it is of inferior quality. Chinese steel industries, therefore, look to India and Brazil for the purchase of iron ore. The Indian iron ore is of better quality than the Brazilian and cheaper. Middle-grade Indian ore costs for China US $ 74 to 75 a tonne as against US $ 80 a tonne for the Brazilian. While the big steel factories in China are able to pay more for the Brazilian ore and still make a profit, the medium and small-scale enterprises (MSEs) producing steel are no longer able to afford the Brazilian ore. They have, therefore, switched over to the Indian ore.

8. China’s crude steel output during the first nine months of 2006 increased by 18.4 per cent to 339.03 million tonnes as compared to 349. 36 million tonnes during the whole of 2005. China has become the world’s top steel exporter, with its exports during the first nine months of 2006 (32.85 million tonnes), constituting about one-third of the US’ total steel production. In the absence of the cheaper Indian iron ore, Chinese steel and steel products would be costlier, thereby pushing up the cost of production of its defence and other industries and its construction sector.

9. As the Indian economy expands and as the Indian steel industry develops, the domestic demand for iron ore is expected to increase. Presently, India’s iron ore reserves are satisfactory and it has more than it needs for its steel industry, but there is already some criticism of its short-sighted policy of allowing its ore reserves to deplete in an attempt to make quick money, in disregard of the future needs of its steel industries. This criticism—particularly from the leftist circles— was quite evident when a South Korean company entered into a long-term contract in Orissa for the purchase of iron ore. Surprisingly, while the communists have criticised the indiscriminate sale of iron ore to pro-Western countries, they have observed a discreet silence on the export of iron ore to China

10. If there are future restraints on iron ore exports for any of the reasons mentioned above, it could affect the expansion of Indian exports to China, unless the Chinese, in the meanwhile, develop an interest in the import of other goods from India—-particularly from the Indian manufacturing sector.

11. Manufactured goods constitute a major bulk of the Indian imports from China—with electronic equipment constituting about 28 per cent of the Indian imports. What has been happening is that during the last four years there has been a tremendous increase in the import of consumer goods—-particularly electronic equipment— of Japanese and South Korean design from Japanese and South Korean factories in China, where the cost of production is lower than in Japan and South Korea. As the salaries for the employees of these factories in China increase, this cost advantage is likely to diminish.

12. Moreover, many of these Japanese and South Korean companies, which are now exporting these goods to the Indian market from China, are in the process of setting up their factories in India in order to meet the future Indian demand. When these factories get going during the next two or three years and are able to meet the demands of the Indian consumers, the demand for these manufactured goods from their factories in China could come down. Unless the Indian consumers are attracted by alternate products made in China at low cost, which are not available elsewhere at comparable price, this is likely to have a negative impact on the imports from China.

13. After taking into account these factors, one could say that while the bilateral trade will continue increasing, one cannot say for certain that it will increase at the present rate.

14. An examination of contract and investment flows between the two countries is rendered difficult by the differing statistics depending on whether they come from Indian or Chinese sources and by the tendency in both India and China to mix up figures of the value of construction contracts won and of investment flows approved and actually realised. It needs to be remembered that even long before China opened up its economy to the rest of the world in 1978, its State-owned construction companies had made a name in the third world for the quality of the construction skills of their engineers and for their adherence to time-schedules and these companies were competing successfully in the third world for construction contracts. It has been estimated that even before 1978, Chinese State-owned construction companies were winning construction contracts worth billions of dollars per annum in different countries of the third world. The Chinese companies and their engineers and other skilled personnel have maintained that reputation and continue to flourish.

15. But, Chinese construction companies—except some from Hong Kong— were not much in evidence in India till the late 1990s. This was largely a reflection of the strained political relations between the two countries. With the improvement in political relations and with the greater comfort level between the leaders and policy-makers of the two countries, this has been changing and Chinese construction companies have started winning many contracts. According to the figures of the ASSOCHAM, Chinese construction companies have already won contracts worth US $ one billion for the construction of thermal power stations, a gas pipeline, highways construction etc.

16. However, in his address to the India-China Economic, Trade and Investment Co-operation Summit at Mumbai on November 23, Mr.Hu cited a higher figure of US $ 6.1 billion and said: “India is now one of China’s most important project contracting markets.” Figures regarding construction contracts, if any, won by Indian companies in China are not available. There is no mention of it in the statistics released by the ASSOCHAM on the eve of Mr. Hu’s visit. However, one would not be wrong in assuming that the figures would not be very high.

17. There are three defining characteristics of Chinese construction companies, when they win contracts abroad. First, their tendency to bring their own engineers and other skilled personnel instead of recruiting locally. This is stated to be because of their confidence in the quality of their own personnel and language difficulties. Second, their tendency not to sub-contract any part of their work to locals. And third, their habit of often bringing their own security personnel as one has been seeing in Sudan and in Balochistan in Pakistan.

18. Not infrequently, these practices generate local resentment against the Chinese as one has been seeing in Gwadar in Blaochistan where there has been a growing resentment of what the Balochs perceive as the monopolisation of the newly-created jobs by the imported Chinese and Punjabis.

19. One has been seeing the beginning of a similar trend in India. It has been reported that the Chinese wanted to bring 1,800 engineers and other skilled personnel for the pipeline construction, some of which will reportedly be in areas where Maoist insurgents are active. When the security agencies and the visa-issuing authorities took time for their security vetting, the Indian Communists, on whose support the present Government is dependent for its survival in power, raised a big hue and cry over it and pressurised the Government to expedite the issue of visas to them.

20. I raised this during a discussion in a private TV channel and pointed out that the Communists would have created hell and organised a strike, if an American contractor had wanted to bring even a hundred engineers, but they are justifying the import of 1,800 engineers and other skilled workers by a Chinese company. A prominent Communist leader, who participated in the debate, accused me of living in the past and of not moving forward with history and alleged that I was unnecessarily trying to sensationalise small issues in order to mislead the people.

21. Such things need to be pointed out because they contain possible seeds of future tension in the bilateral relations.

22. The statistics regarding the two-way investment flows differ too, depending on whether the source is Indian or Chinese, but one thing is evident from both figures—there are more investment flows from India to China than the other way round. According to the ASSOCHAM figures, since India opened up its economy in 1991, the total value of Chinese investment flows into India upto 2004-end (Actuals as against approvals) amounted to US $ 0.83 million only, representing 0.001 per cent of the total Foreign Direct Investment (FDI) flows into India. During the same period, the value of approvals of FDI proposals from China amounted to US $ 231.7 million, representing 0.30 per cent of the total approvals from all countries. During this period, Indian FDI flows into China (actuals) amounted to US $ 79.1 million.

23. According to XU CHANGWEN, who cites figures of China’s Ministry of Commerce, Chinese companies had set up 17 non-financial enterprises in India by the end of 2004, with a contract investment (approvals) of $39.4 million, centered on mechanical equipment, IT, and organic and chemical products. Some other projects on information and communications remain under negotiation. During the same period, Indian companies had invested in more than 138 projects in China with a contract value (approvals) of $297.55 million, and $98.61 million paid in (actual), focusing on pharmacy, IT, refractory material and diamonds.

24. Writing in the “Asia Times Online” on September 16,2006, Ms.Pallavi Aiyar, the Beijing Correspondent of “The Hindu” of Chennai, says as follows: “Indian investment in China currently stands at a measly $130 million. By the end of 2005, US businesses had actually invested $51.1 billion in China and set up 49,000 enterprises in the country. Last year alone, China’s total foreign direct investment (FDI) inflows were worth $72 billion. Chinese investments in India are not much cause for celebration either. According to the Indian government, FDI inflows to India from China between August 1991 and October 2005 worked out to a grand total of $2.03 million. Chinese statistics put the figure considerably higher, at about $47.35 million, but given that India’s total inward FDI for the same period stood at $36.2 billion, even this number is distinctly unimpressive…..

25. She further writes: “Trade alone cannot provide long-term stability to a bilateral economic relationship given that it is affected by a gamut of short-term circumstances and can, as a result, prove fickle. Mutual investments are thus crucial to a truly sustainable economic engagement. In recent years Indian companies have begun to be attracted by the opportunities China offers. Its high-volume, low-cost investment environment, connectivity to global markets and productive labor force and the presence on Chinese shores of large numbers of multinational clients have lured a small but steady stream of Indian investors in diverse sectors,, including information technology (IT), pharmaceuticals, banking, wind-farm equipment, auto components and tire manufacturing. Yet the majority of these investors in both the manufacturing and services sectors either sell to multinational companies in China or export their products out of China to their traditional buyers. The meaty Chinese domestic market remains an imposing Great Wall that so far few Indian firms have been able to scale. Even the much-hyped synergies between India’s software prowess and China’s hardware might have failed to materialize. All the big Indian IT companies, such as TCS, Wipro, Infosys and Satyam, have invested in China. However, despite predictions that Indian companies could come to account for up to 40% of the $30 billion domestic Chinese market for software, so far none of India’s IT heavyweights has been able to make a dent in this market. Foreign-owned companies continue to be kept out of the really large, multimillion-dollar IT deals at the state-owned enterprises, and Indian companies have found barriers like language and culture more challenging to overcome than expected.”

26. Till 2002, figures of Chinese FDI flows into other countries were treated as a State secret. Only from 2003, China’s Ministry of Commerce started publishing these figures. In 2003, the total value of the Chinese FDI flows into other countries was US $ 2.85 billion, of which US $ 1.38 billion was invested in the oil and gas sectors. The corresponding figures for 2004 were US $ 5.5 billion and US $ 1.8 billion and for 2005 US $ 12.3 billion and US $ 1.68 billion.

27 In China, all decisions regarding investment destinations abroad are taken by the Government not on the basis of economic considerations, but strategic and national security considerations. The question posed while taking decisions is not whether the investment will be profitable, but will the investment strengthen national security. Countries which are suppliers of oil and gas to China and countries with which China has military-related relationship enjoy a greater priority in the eyes of the decision-makers than others. Hence, countries such as Angola, Sudan, Pakistan etc enjoy a greater priority than India. In Chinese eyes, the value of India is as a destination for short-term construction contractors and not long-term investors.

28. In the issue dated November 15, 2006, of the “Guardian” of the UK, Shri Salil Tripathi, a London-based analyst, writes as follows: “Chinese investment push is driven not by the profit motive, nor by a desire to improve Beijing’s balance sheet and seek more investors, but by strategic national objectives. When such objectives determine investment, cost is no bar – which explains Chinese munificence in Angola.

The Chinese firms that invest overseas tend to be resource companies focusing on oil, gas and minerals. They are state-owned (such as the Chinese National Petroleum Corporation, Petrochina, and CNOOC, the jilted suitor of Unocal), have close ties with the armed forces (Norinco and, perhaps, Haier) or are led by individuals with close ties with the Communist party. The independent private sector remains in its infancy in China. Many leading private sector “Chinese” companies are actually run by Hong Kong-based businesses such as Li Ka-Shing, or are owned by the Chinese diaspora. Indian companies expanding overseas are fundamentally different, as they are more responsive to pressure.

That accountability is not forced by India’s democracy. It is because many of these companies are from the private sector (though in the oil business, fewer are). When private individuals, rather than the state, run a company, they must earn a return, justifying the backing of investors, and pay their lenders on time.”

29. If long-term investment flows and not trade flows are taken as the real yardstick for assessing the soundness and durability of the economic relations between two countries, India and China have still miles to go before they can celebrate. To be continued

(The writer, Mr.B.Raman, is Additional Secretary (retd), Cabinet Secretariat, Govt. of India, New Delhi, and presently, Director, Institute For Topical Studies, Chennai.

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