Sino-Indo Relations, Powering Ahead!

Sino-Indo Relations, Powering Ahead!

Roshan Madawela, Research Intelligence Unit - www.riunti.com


Head of the world’s largest economy, Chinese President Hu Jintao arrived at New Delhi’s Indira Gandhi International Airport on Monday for a visit seeking to boost trade relations and strengthen diplomatic ties. Indian officials did not down-play the significance of the visit with the Indian Foreign Minister telling diplomats that the management of the vital relationship would ‘have a tremendous impact on peace and stability in the regional and increasingly the global context,” according to the AFP.

Some observer’s think that a number of obstacles still remain before warmer relations between the two giant nations can be achieved. Territory disputes, threat perceptions and triangular relationships, what Asia Times reporter Jing-dong Yuan, calls the ‘four T’s’ are at the fore of concerns. The latter ‘T’ refers to the China-India-Pakistan and China-India-US relationship triangle that increasingly conditions Indo-Sino relations. The fact that President Jintao is traveling to Pakistan after his three day stay in India serves to stress this point.

Both powers remain cautious of each others military capabilities. A recent remark by China’s Ambassador to India asserting Beijing’s rights to the entire Arunachal state only served to re-kindle the Indian Sino-phobic camp. Beijing for its part
might get increasingly uncomfortable with strengthening US Indian ties that have been sealed with a nuclear deal. It is no secret that China view closer Indo-US ties as part of a Washington policy to use India to keep China in check.


Trade partnership

However, Indo-Chinese relations are based on a massive trade partnership and any political considerations will take a back-seat with both parties promoting the visit as the ‘Year of China India Friendship’. The first high level visit in a decade, the two nations have agreed to a ten point plan aimed at locking-in ties and intensifying trade at the fore of the strategy. With the value of current trade estimated at around $20 billion, a target of $40 billion has been set for 2010. Even some eight years back, such a situation would have been unimaginable given China’s disapproval of Indian nuclear testing and the Sino-phobia on the part of Indian economists with regard to being flooded with cheap Chinese imports. This is reflected in the volumes of trade that have grown from a mere $117 million in 1987 to $20 billion.

Energy, agriculture, education and technology are amongst the key areas that have been listed for future cooperation. In July this year the two nations reopened the historical Nathu La Pass that had been closed since the 1962 war, further raising expectations of more cross-border trade. Beijing and New Delhi are also expected to enter into a free-trade pact in the near future with negotiations already said to be under-way.

In May 2005, the two governments entered into a defense cooperation MoU and further progress was said to have been made in this direction during the latest visit. The areas of cooperation include confidence building in the military field, port calls, joint search and rescue operations and defense exchanges.

On the day President Hu Jitao flew in the Indian Commerce and Industry Minister made a statement dismissing rumors of country specific regulations on FDI based on security concerns. Some Indian policy maker had been pushing for stricter control on Chinese investment inflows.

Record breakers

It was also reported that India’s targeted $10 billion in FDI for the year was expected to be achieved as some $4.4 billion had already been recorded during the first six months of the current financial year (April – September 2006). The figures represent a record breaking 100 per cent increase from the same period one year back. During September alone some $916 million of inflows were recorded into the Indian economy.

Region wise, the best achiever was said to be Chennai and Poducherry, posting an FDI gain of 227 per cent to claim $437.3 million. Much of the investments were in computer hardware and leather sectors. In absolute terms, the Delhi region which includes Uttar Pradesh and Haryana maintained top place with $936.5 million FDI, a growth of 25 per cent according to The Hindu news sources. Services attracted the maximum investment of $1.5 billion, a growth of 350 per cent whilst the telecom sector, with inflows of $405 million, showed the maximum growth of 950 per cent.
China’s phenomenal achievement for the year can be given with reference to an unprecedented reserve holding of $1 trillion, a doubling from 2004. Whilst an estimated 70 per cent of the funds are said to be held in the form of dollars, the signs are that things are about to change. Fan Gang, Director of China’s National Economic Research institute and member of China’s monetary policy committee recently claimed that the world’s real problem today is an overvalued dollar. He also accused the US Treasury of printing too much money. With similar sound-bites being aired from the governor of the People’s Bank of China, analysts expect a diversification of Chinese foreign exchange reserves away from dollars. The exact nature of a switch is yet unclear. Analyst Jason Hamlin estimates that Chinese reserves represent sufficient funds to purchase all gold sitting in central banks vaults, twice over.

Lessons learned

India had one of the largest camps of Sino-skeptics who actively shied away from better trade co-operation with its larger neighbor. Alarmed by the increased China / ASEAN pacts, they voiced their opposition to closer cooperation by claiming that it will lead to a flood of inbound goods. Whilst cursory observations may have supported these fears, closer examination of specific industries revealed a different picture. Taking India’s growing software industry, on the surface, it would appeared that China’s goal of entering the global software services market was a direct threat to India’s share of the same market. However, this was not inevitable and ultimately proved incorrect. Essentially, the Chinese growth process offered India a large share of the Chinese software market estimated to be worth some $11 billion in 2004, dismissing the initial fears of many a phobic.

Fortunately, most Indians in the sector were hip to the opportunities that included the exporting of its large IT professional base of 550,000, almost four times that of China’s 150,000 to fill a shortage of professionals in the latter. Many of the larger players also bought up Chinese software firms, entered joint ventures and/or adopted a policy of employing local consultants.

According to the Confederation of Indian Industry (CII), between January and August 2002, India-China bilateral trade rose by an astonishing 37.5 per cent, compared with the same period in 2001. Whilst Chinese exports to India rose by 40.8 per cent ($1.6 billion), Indian exports to the Peoples Republic of China increased by 33.7 per cent ($1.4 billion). According to the data, China overtook Japan as number one Indian export destination in 2002. It had already overtaken Japan as a source of imports into India worth $1.9 billion compared with $1.77 billion from Japan some three years back.

In addition to the diplomatic easing of past tensions and the opening of ancient trade routes a large number of trade shows were held to facilitate greater trade during the past five years. Events like the “Made in India Show” along with “India-China Hi Tech Conference’ spearheaded the drive for more and more commerce exchange. The pro-Sino camp in India appears to be continuing to have the larger say in India’s trade strategy, certainly for now.



Copyrights (RIU 2006). Prepared exclusively for the Business Standard.