China’s India necessity

As Chinese Premier Li Keqiang prepares for his visit to India, what are the possibilities that could arise from his historic visit?

Three issues have, over the past sixty years been prominent in Chinese and India diplomacy; the border issues, Tibet, and trade. All are on the agenda for Li’s visit, and all have recently been raising their hands begging for attention.

Looking beyond the India-China border disputes for a moment, the recent behavior of China towards its neighbors has been somewhat assertive. During the past eighteen months it has managed to engineer serious diplomatic incidents with Japan – the world’s third largest economy and massive investor in China; India, now the world’s fourth largest economy, and many of its neighboring countries including Vietnam and Philippines, the latter of which is taking China to a United Nations tribunal to bring a resolution on territorial issues concerning the South China Sea. Despite China being signatory to protocol agreements concerning maritime disputes, it has rejected the UN tribunal out of hand. Recent history then – including the bizarre incursion into Ladakh three weeks ago – would seem to indicate that China’s position on these matters has a fair degree of consistency.

Such issues, on China’s part, are unwise in the longer term. Upsetting the world’s third and fourth largest economies and ignoring UN calls to attend dispute arbitration are dangerous diplomatic games to be playing.

Japan has already suggested that it is now tired of China’s insistence on constantly treating its country as a back to be beaten with a stick, and Japanese foreign investment is now being repositioned to concentrate on developing other markets in South-East Asia. China, in the Japanese business community at least, is considered ‘unfriendly.’ While Japanese cars may have been attacked and burned in China during the Daioyu Islands dispute, and their nationals beaten up, trade also plummeted. Japan sold far less to China than in the previous year. Chinese diplomacy does not appear to understand that strong trade relations require a consistency of respect and to allow bilateral development. Consequently those Japanese investment Yen will now be making their way elsewhere. For China, picking that fight was not such a smart idea.

India’s border issues with China meanwhile are relatively recent. Prior to the Chinese takeover of Tibet, the inconsistencies surrounding the ‘Actual Line of Control’ were never an issue. India shared a border with Tibet, not China. Tibetan and Indian diplomats would meet in Lhasa and things would be smoothed over. The faintly ridiculous Chinese position of claiming much of Arunachel Pradesh as a “proven vassal state of Tibet” is also rather absurd. While the Chinese Communist Party insists that it holds the historical keys to China’s heritage, that’s not really the historical position. Neither Ladakh or Arunachal have ever been under Chinese control. That they were under Tibetan control seems to be the same thing as concerns contemporary Chinese diplomacy. Proving that Tibet was always part of China as a de facto vassal state and that China held “suzerainty over it” is disingenuous, and inaccurate. If taken to their logical extent, the suzerainty and vassal state issue should, if anything, mean that Tibet – according to the same guidelines – should actually belong to Mongolia. For it was Mongolian troops in the 16th century which provided protection and controlled trade, prior to the Chinese doing so. As the dominant power in Asia at that time, Mongolia claimed Tibet as a vassal state, and should we lest forget, much of Chinese territory too. Yet the Chinese history books show Genghis Khan as a “Chinese” Emperor – a position today that if still alive, would once again release the Golden Horde into China to wreak revenge for their impertinence. Genghis Khan was, as everyone except the Chinese seem to acknowledge, Mongolian.

One should perhaps ask Mr. Li if he realizes that the actual position of contemporary Beijing’s layout, and the straight lines of its various avenues, some of which he drove along to get to Beijing’s Capital Airport on the way to Delhi, actually follow the ancient, original plans of the Mongolians’ rebuilding of the city once they had sacked it in 1215. He may also wish to be reminded that the Dalai Lama’s very name is both Mongolian in origin and was bestowed upon the young Tibetan Monk-King Sonam Gyatso by the Mongolian ruler Altai Khan in 1578.

Indian diplomacy will mean these historic facts will remain unmentioned lest they embarrass their guest. This is not the time, but Beijing cannot hide the truth concerning Tibet – or India’s close relationship with it – forever. China’s position on Tibet, and therefore much of the border disputes it has with India, is unsustainable. China has no workable policy other than belligerence and claims to sovereignty over Tibet that have never really existed. It is a shaky position from which to be securing a large territory and will prove ultimately unmanageable under Communist Party, atheist rule over a country that remains an ancient religious powerhouse with Buddhist and cultural ties that have long impacted upon the rest of Asia.

An old British slang word for someone argumentative is “Bolshie.” It is relatively recent, derived from Anglo-Russian at the beginning of the previous century, when Russia’s Bolsheviks argued their policies and beliefs to the extent that they would ultimately shoot anyone who persisted with an alternative doctrine. A revolution in Russia resulted, and the Bolsheviks turned into Communists. The difference today is that while Russia has shed off that period of its history, the Chinese communist revolution is still going on. Nicholas Roerich, that great Russian traveler, during his trips to China, India and Central Asia once commented that the Chinese would always argue and never reach an agreement as a matter of policy. With China, diplomatic negotiations are an on-going game, and the only way to play it, when it comes to any disputes over property, is to negotiate in a fashion that perpetuates “an agreement to disagree”. This policy continues. The Philippines have gone to the UN to solve the China-Philippines South China Sea disputes – following 34 meetings with their Chinese counterparts in the past two years that went nowhere. Accordingly do not expect Mr. Li to be bearing any breakthroughs concerning territorial issues with India.

Trade however is another matter. Although here again China today apparently holds many of the cards, subtle shifts are occurring. Bilateral trade with India was some $66 billion in 2012, 10% down from 2011. With the trade balance in China’s favor to the tune of $29 billion, India will be pushing for more access to China’s markets. The turndown in trade last year can be explained as a result of remaining uncertainties on the global economic situation, and the global commercial uncertainty that India foisted upon itself over the Vodafone capital gains tax case and that of multi-brand retail. Investors prefer a sustainable position, not flip-flops, and hopefully India learned its lesson – it certainly seems to be one Finance Minister Chidambaran has taken on board.

Longer term, Indian companies may have the edge over China, and not just in bilateral trade. China has a major economic issue to solve, one that is specifically the task of Xi Jinping’s government to solve, and it is about the state owned companies (SOEs). China’s SOEs still comprise the vast majority of Chinese state bank loans, and much remains wasted. The employment dynamics in China have also changed in a way that China’s economic structure has been unable to keep up with.

Twenty years ago, over 60% of China’s workforce were employed in the state owned enterprise sector. Today, that figure has dropped to 20%. Yet state bank lending still concentrates on the SOEs, leaving a huge number of China’s latent entrepreneurs disenfranchised. This can also be seen in the make up of China’s stock exchanges – 90% of the companies listed in Shanghai and Shenzhen are SOEs. In contrast, 90% of companies listed in India are run by entrepreneurs, with the government restricted to strategic industries. China needs to get its SOEs off the state dole and onto financial market funding, diverting more funds to its entrepreneurial class. But when China’s own officials are so entrenched with share ownerships of those same SOEs, whether the current Chinese government can manage this remains to be seen. India’s entrepreneurs on the other hand, are relatively unfettered by such binds.

The big question for China is in fact dealing with this economic reform, and the country has the decade of Xi Jinping’s authority to solve this. If it does not, it will start to experience serious problems within 10 years.

This coming decade therefore, is India’s opportunity to play catch-up with the levels of foreign investment and GDP growth achieved by the Chinese over the past 20 years.

The opportunities are there now for India’s entrepreneurial classes to sell to the new Chinese consumer class, and bring the trade gap down. It is already starting to happen. When China’s Geely, a domestic SOE, purchased Volvo, the world watched. But Volvos are not a huge seller in China, and Geely has failed in this purchase of a renowned brand. By contrast, the world also watched when Tata bought Jaguar and Land Rover. Both are now the hottest and most sought-after cars one can buy in China. India’s entrepreneurs should be encouraged to sell to the China market – some 250 million, the same size as India’s today, and set to grow to 600 million by 2020.

Consequently, one thing Mr. Li cannot negotiate are the current demographic differences between the two countries. Simply put, India has a very young population – the average age of an Indian worker today is 23, while China has one of the fastest aging populations in the world – the average age of a Chinese worker is now 37. On the workers issue, it means that China is coming to the end of its cheap labor dividend (interestingly, the average age of a Chinese worker 20 years ago is the same now as contemporary India’s at 23). With close to a quarter of China’s population set to reach retirement age by 2020, China needs an alternative supply of young labor, and products sourced from other countries. Indian pharma for example, should be looking at the ageing Chinese consumer market. Given the right circumstances, Indian businesses can assist here, and it would not be a surprise to see the development of a large number of Indian-Sino joint ventures spring up in the years to come, manufacturing the cheap products that everyone needs, both for the Indian market, for Chinese consumption and further afield across Asia and beyond.

Both countries in fact are set to step up this logical trade dynamic further within the current negotiations of the Regional Comprehensive Economic Partnership (RCEP) which links the ASEAN free trade bloc (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam) with India, China, along with Japan, South Korea, Australia and New Zealand. The RCEP will see the abandonment on tariffs for thousands of products across this region, meaning that products of Indian origin falling into this remit can be exported to China – and its growing middle class consumer – at zero rates. Due to be signed off at the end of this year, the RCEP agreement will be a boost for Indian industry – and with that worker age demographic kicking in, a potential boom time for Indian-based manufacturers selling right across China and the RCEP region.

Where Li Keqiang stands on these issues is anybody’s guess. He graduated both as a lawyer and in economics, from Peking University. However he also studied Mao Zedong thought (winning a prize). He appears to be an economist steeped in Marxist economic theories. Accordingly do not expect any breakthroughs in any of the border issues. A few show orders will be signed, and that will be that. Do not also expect any changes from Mr. Li, and quite where that will leave China in its relations with India as it struggles to adapt both its diplomacy and trade engagement in an increasingly globalized world, remains to be seen. Keen Sino-Indian watchers will be waiting to see how he settles into his personal relationships with Indian officials.

To some extent, Mr. Li’s hands are tied. Having scared Japanese investment away, right at the time that Chinese consumers are demanding better lifestyle choices, the obvious place to visit in order to satisfy the demands of the new Chinese consumer is India. Li cannot afford to upset both the Japanese and the Indians simultaneously. As the third and fourth largest economies in the world, China needs both Japan and India, and they’ve already pushed the Japanese too far. Given the right diplomatic approach, India might just find that the Chinese more amenable in their diplomatic and trade issues than has been the case in the past.

Now is the time for India to look seriously at the China market. Li’s visit will include an empty shopping basket of opportunities that he needs to fill in order to keep his own domestic consumers content. If he does not, it places serious stresses on the Chinese government domestically – and as a one-party state, that is the number one issue to be avoided. It is going to be vital for Mr. Li to encourage Indian companies to fill that Chinese consumer need, and additional concessions may, if handled correctly by India, be sought as a result.

Chris Devonshire-Ellis is the Managing Partner of Dezan Shira & Associates, a foreign direct investment practice handling MNC clients investing in China, India and ASEAN with seventeen offices across the region. Contact: asia@dezshira.com or visit www.dezshira.com

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