India-China: evolving geoeconomics

The geoeconomic relationship between India and China is gradually evolving—from  “over-the-wall” trade exchanges to an integrated relationship defined by deeper business and financial links.

India needs capital and it wants to build a manufacturing base. The government-led commercial MoUs and the $3.43 billion business deals facilitated by FICCI during President Xi Jinping’s recent visit seem to be working towards these goals.

The $2.6 billion agreement last week between Indigo Airlines and the Industrial and Commercial Bank of China (ICBC) is one such example of an Indian business taking advantage of China’s favourable financing terms. Reliance Communication also signed deals worth $150 million to purchase equipment from Huawei and ZTE.

These agreements add to a series of large financing deals signed by Indian businesses for loans, bonds, and credit lines over the last few years.

In 2011, Reliance Communications signed a $1.3 billion loan agreement with the China Development Bank (CDB) after Prime Minister Wen Jiabao visited India in 2010. It was the largest loan between India and China at the time, supplemented by a $600 million deal for financing imports of telecom equipment from Chinese vendors.¹ Reliance followed it up in 2012 by refinancing its outstanding FCCBs (foreign currency convertible bonds) worth $1.18 billion with ICBC, CDB and the Export Import Bank China (EXIM China).2

The agreement signed during Chinese President Xi Jinping’s visit to India between Gujarat’s Industrial Extension Bureau and CDB to jointly develop industrial parks has elevated the business engagement between the governments of India and China. It is similar to the cooperation India has built with Japan over the last decade.

Some of the $20 billion committed by the Chinese government during this trip in capital investments to India over the next five years will be directed to this engagement. ³ Even if India’s $36 billion trade deficit does not reduce immediately, the capital account should help with balance in the interim.

Beyond bilateral trade exchanges, China’s invitation to India to join the Asian Investment Infrastructure Bank (AIIB) is pending for a while. China is setting up the bank to develop regional infrastructure and has already earmarked $50 billion for the initial capital. India is yet to respond to the invitation, but is likely to be interested. The proposed AIIB will be separate from the BRICS Bank, where the two countries are already partners along with Russia, Brazil, and South Africa.

India and China are also working together to develop the Bangladesh-China-India-Myanmar (BCIM) corridor.  Its first study group meeting was held in December 2013 and planning is underway.

In the coming years, China will want its currency, the renminbi, to penetrate the Indian capital markets. It has already signed currency swaps with 21 countries around the world worth RMB 2,600 billion ($420 billion), and is encouraging partner countries to pay for their imports from China in renminbi. So far, India is not one of them.⁴

Even though companies such as IL&FS and ICICI Bank have tapped offshore renminbi bond markets to raise funds successfully, there is little demand in India at the moment for renminbi. In 2011, the Reserve Bank of India did allow Indian companies to borrow in renminbi with a total limit of $1 billion. ⁵ However, it revoked the decision in 2013 due to a lack of demand. ⁶

Nevertheless, banks in both countries are upgrading their relationship and it is only a matter of time before renminbi-based or rupee-based loans become more common. Axis Bank signed a deal with CDB during this visit. ⁷ ICICI Bank has also signed new deals with EXIM China and CDB. The State Bank of India is already authorised to conduct local currency (RMB) business at its branch in Shanghai.

Although greater ease of financing helps import critical products, it paradoxically also worsens the trade deficit. Over the last decade, of the $500 billion in electrical equipment and machinery that India imported, 30% came from China. ⁸If these imports are manufactured by Chinese companies in India, at the industrial parks, it will reduce the trade deficit and help India save valuable foreign exchange.

As the bilateral geoeconomic integration evolves, India will have to assess the potential benefits of each aspect of the economic engagement more carefully. China’s strategy is well-defined and based on its core competencies: it wants to export goods and extend loans to India, whereas for transnational initiatives China plans to focus on developing and financing regional infrastructure.

China can afford to invest in infrastructure and railways, which are sectors with long gestation periods. India, on the other hand, must promote its services industry.

During the Chinese president’s visit, the India-China Joint Economic Group agreed to expedite “market access to Indian products such as agricultural, pharmaceutical and export of services.” It is in India’s interests to ensure that this happens quickly and in our favour. Otherwise, India will find itself losing the benefits of the geoeconomic integration.