Rejecting China

ON APRIL 11, 2020, a shade over two weeks after India went into an unprecedented national lockdown due to Covid, a filing on the Bombay Stock Exchange by India's biggest mortgage lender HDFC Ltd. sent shockwaves all the way to North Block. HDFC informed that China's central bank, People's Bank of China (PBOC) had acquired 1.75 crore additional shares in the company, upping its stake to 1.01%.

Amid the Covid meltdown in equity markets, HDFC's share price had eroded 35% between February and April 2020. On the face of it, PBOC's move was a case of bottom fishing by a Chinese institution amid attractive valuations. However, the concern for Indian policymakers was a deeper one — opportunistic takeovers by Chinese firms (many of which are believed to be controlled by the state through non-transparent links) of Indian companies available relatively cheap.

With that began the Centre's overdrive to keep China in check. In the three years since, India's policy of maintaining status quo despite Chinese excesses, lest the dragon be irked, has long receded into the horizon and a proactively protective, even aggressive, stance in favour of indigenous businesses and economic interests has been accorded primacy.

This tectonic shift since early 2020 has seen India take successive China-specific measures. Mega policy moves such as FDI restrictions on Chinese companies, barring them from 5G, bringing erring Chinese mobile manufacturers to book and substitution of Chinese imports have been rolled out in quick succession. Since 2020, 58 Chinese FDI proposals have been rejected by India, while 14 more have been put on hold. India also pulled out of the China-led trade block Regional Comprehensive Economic Partnership (RCEP) in November 2019. To counter China's Belt and Road Initiative (BRI), a multi-trillion dollar connectivity project involving 150 nations, India and the U.S. announced the India Middle-East Economic Corridor (IMEC) on the sidelines of the New Delhi G20 summit in September. An MoU on the IMEC has been signed by India, U.S., Saudi Arabia, UAE, EU, Italy, France and Germany.

Chinese FDI To India Singes

Annual FDI from China has fallen from $494.8 million in FY15 to a 10-year low of $10.5 million in FY23, commerce ministry data shows. FDI inflows into India from Hong Kong, too, have come down to $78.4 million in FY23 from $344.84 million in FY16.

During the period, FDI from the U.S. and Singapore rose significantly. U.S. FDI inflows went up to $6.04 billion in FY23 from $1.8 billion (FY15), while Singapore went up to $17.2 billion from $6.7 billion. There has also been a fall in stake of Chinese investors in Indian companies (See graphic: Fall in equity stakes).

Countering China: The First Steps

The HDFC alert was triggered by predatory moves by Chinese firms in the U.S., Australia, the U.K., Germany, Spain and Italy, prompting them to introduce policies to prevent such takeovers. A May 2020 bill introduced by an influential American Congressman in the House of Representatives sought to prevent predatory acquisition of American companies by Chinese government-owned agencies. In the wake of the pandemic, European institutions, too, warned member nations on opportunistic Chinese takeovers in a possible repeat of the post-2008 crisis. Right after the global financial crisis, Chinese investors picked up controlling stakes in strategic infrastructure and mining firms in Spain, Greece and Portugal, including majority holding in Greece's largest port, Piraeus in 2016 by Cosco Shipping Ports — a Chinese state-owned entity. It now owns three ports in Belgium and Spain and has a major stake in 10 more.

Immediately after PBOC's move, the PMO swung into action in the middle of drafting the crucial economic stimulus package along with the Ministry of Finance. On April 18, India amended the FDI policy, imposing a blanket ban on investments through automatic route by entities from countries that share borders with India. Since Pakistan and Bangladesh were already under the purview of the ban, it was essentially targeted at Chinese investments. Entities with Chinese citizens as beneficial owners were also brought under the purview to ensure investments are not routed through other destinations.

Those were the first decisive moves by India against China. A sample of it was rolled out during the Doklam tussle in 2017. The Union Cabinet first rejected, but later curtailed the biggest-ever Chinese investment in the country — the $1.3 billion takeover of Indian drug-maker Gland Pharma by Shanghai Fosun Pharmaceutical.

The Chinese embassy in New Delhi termed India's blanket FDI ban a violation of World Trade Organizations' non-discrimination principle and urged India to revise "the relevant discriminatory practice". Within days of the Chinese embassy's statement, China started the border dispute in Ladakh, in what is seen as a possible effort to use border tensions to settle scores on the business front. Confrontations started on May 5 near Pangong Tso in Ladakh, culminating in the deadly Galwan Valley clash in the intervening night of June 15/16 in which both sides admitted casualties.

Immediately after the FDI move in 2020, India banned 220 Chinese apps, including TikTok and PUBG, tightening the noose against China's growing presence in India's fast-growing digital economy. "The apps were allegedly stealing and surreptitiously transmitting user data in an unauthorised manner to foreign servers," a government source tells Fortune India, adding, the apps had been on the radar of the home ministry for some time before the ban.

Stand-off Intensifies

Three years after the bloody melee, even as stalemate continues on the Ladakh border, India has upped the ante against China's overbearing ways of doing business in an unprecedented manner across sectors.

The impact of the April 2020 FDI policy amendment is now visible. Investments worth $2 billion (₹16,000 crore) from two Chinese auto majors, Great Wall Motors and BYD, have been rejected by India, while MG Motor-owned SAIC Motor (U.K.), which is eventually owned by China's state-owned SAIC Motor — is planning to 'Indianise' (join hands with an Indian company) its structure to continue doing business in the country. Indian authorities have also tightened the noose against tax evasion and alleged financial irregularities by Chinese mobile and technology firms.

Chinese mobile firms Xiaomi, Oppo, ZTE, One Plus, Huawei, and Haier are facing investigations from Central investigative authorities. The Enforcement Directorate (ED) is investigating Xiaomi for alleged wrongful royalty payments to proprietary patent holders abroad, circumventing the provisions of the Foreign Exchange Management Act (FEMA).

Rajeev Chandrasekhar, minister of state in the Ministry of Electronics and Information Technology (MeitY), informed Rajya Sabha on July 21 this year that Chinese smartphone makers Oppo Mobile, Vivo India and Xiaomi, have evaded taxes, including GST and customs duty, to the tune of ₹9,000 crore between FY19 and FY23. The minister informed that the government has recovered ₹1,629.87 crore from the companies during the period.

The Central government successfully kept Chinese telecom equipment majors at bay during the 5G test phase in FY22. There are indications that some of them are ready for a joint venture with Indian firms, given the India potential.

'India, A Valuable Partner To The West'

China's border aggression is not new and has been met with proportionate military response in Sumdorong Chu Valley stand-off in Arunachal Pradesh (1987), Doklam (2017) and Galwan Valley (2020). But what explains the push-back on business and investment? Former foreign secretary Kanwal Sibal says, "India's steady economic rise, which makes us a much more attractive and valuable partner to the West, is being recognised." Experts point at many factors, from the West seeing India as a 'valuable' partner and strategic reasons to China's faltering global image and credibility post the pandemic.

Defence and diplomacy, too, are at play. "India is now fully supporting the Quad initiative. We have been participating in advanced naval exercises with the U.S. and the Quad," adds Sibal. Quadrilateral Security Dialogue (Quad) is a joint initiative of Japan, the U.S., Australia and India to put in place strategies to keep Indo-Pacific sea routes free of Chinese coercion.

Biswajit Dhar, professor, Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi, says: "Anti-China sentiments took deep roots in FY20 with protests against cheap imports of festive wares from China. It is now strategic and geo-political. We are actually in a new cold war."

India's policy to repel China also draws strength from China's loss of credibility and global aversion to it, post-Covid, and India's plan to offer an alternative supply chain destination. "Trade and war cannot go together. The world is getting averse to China. India's policy is to enhance share of industry and manufacturing in GDP, for which it laid out the plan via the Production-linked Incentive (PLI) scheme, and infrastructure push," says Ashwani Mahajan, national co-convener, Swadeshi Jagran Manch (an RSS affiliate).

However, the stand taken by India is no different from what China did to U.S. tech giants earlier. "When you have a market, you expect your pound of flesh. You could use your market strength to build leverage on geo-political issues. This is not new to China. They did the same to Google, Amazon and Facebook," says Divakar Vijayasarathy, founding partner and CEO, DVS Advisors, a professional service company which provides tax, legal, risk and M&A advisory.

A 2020 Brookings India report points out a direct relationship between large Chinese companies and the government. "While Chinese private sector's abiding objectives are maximising profits and answering to shareholders, it is to be noted that its roles and responsibilities to further the goals of the Communist Party are clearly laid out. The party has co-opted tech CEOs by appointing them to National People's Congress (legislature) or Chinese People's Political Consultative Conference (a politically advisory body, or upper house), including Xiaomi's founder and CEO Lei Jun and Baidu's founder Robin Li. By end-2016, close to 70% of non state-owned companies had party cells or branches in their organisations," the report authored by Ananth Krishnan says.

Law Violations By Chinese Mobile Firms

A number of Chinese firms, particularly mobile and digital companies, are currently under scanner of various investigative agencies.

On April 30 last year, the ED said it seized ₹5,551 crore of Xiaomi Technology India lying in bank accounts under FEMA provisions in connection with alleged illegal outward remittances made by the company. The ED claimed illegalities in royalty payments by Xiaomi Technology India to overseas intellectual property partners. The agency has been investigating Xiaomi Technology India's foreign funding, shareholding, financial statements and related activities.

Fortune India exclusively accessed details of payment made by Xiaomi Technology India to Qualcomm and Beijing Xiaomi Mobile Software — the two entities it has paid royalty to since 2016. Xiaomi India paid ₹4,674 crore to Qualcomm between 2016 and 2022 and ₹877 crore to Beijing Xiaomi Mobile Software, the amount the ED seized under the FEMA act.

Xiaomi moved the Karnataka High Court for quashing the ED order dated April 29, 2022. However, in April 2023, the bench headed by Justice M. Nagaprasanna dismissed the petition, upholding the ED order. Following this, Xiaomi appealed against the single-judge verdict and a division bench of the Karnataka High Court has issued a notice to the Centre.

Ranjana Adhikari, partner, IndusLaw, opines that Chinese firms need to be conscious of compliances. "Right now, we are seeing a sea of investigations on technology licensing contracts for Chinese mobile companies. Before that there was a wave of blocking of Chinese apps. Where was all this stemming from? It is very obvious that government sentiment is not one of complete trust. It makes investors worried. And the next obvious step for anyone is exuding more caution in the manner of doing business. Compliance and having very robust clauses reflecting the essence of the relationships is the way forward," says Ranjana.

The I-T department has conducted many raids on Xiaomi, OnePlus, Vivo, Huawei, ZTE and Haier in the last three years. It raided ZTE's Gurugram premises in August 2021, and Huawei's Delhi, Gurugram and Bengaluru premises in February this year. ZTE is believed to be looking at the MG Motor model to continue its presence in India, and is reportedly scouting for Indian partners to bring in the trust factor.

Another Chinese firm, Oppo Mobile India, has allegedly evaded ₹5,086 crore in taxes, including ₹4,403 crore in customs duty and ₹683 crore in GST, says data shared by MeitY in Parliament. A mail seeking a response from Oppo Mobile remains unanswered.

Uphill Drive For Chinese Auto Firms

India's unprecedented push-back is playing out in auto investments, too. Plans by BYD and GWM have been rejected. MG Motor India, which has been manufacturing and selling in India since 2018, is holding fort. The company plans to "Indianise" local operations. "We will finalise the new investors-cum-owners of MG Motor India, who together would own more than 50% of the company in FY24," says Rajeev Chaba, CEO emeritus, MG Motor India. Plans include raising ₹5,000 crore via stake sale to Indian investors and redeploying it as capital expenditure. The company also plans to ramp up capacity at its Halol, Gujarat plant to three lakh units annually by 2028, from 70,000 currently, and set up another plant in Halol. Indian players, including M&M and Sajjan Jindal, are believed to be in talks to buy a stake in the company.

For BYD, it seems a dead-end in India after its $1 billion investment plan was rejected in July. The company did not respond to a mail by Fortune India on its future plans. GWM had to shelve plans last year as it could not secure clearances. It fired its 11 Indian employees on July 1 last year.

Telecom Networks A No-Go Area For Chinese Firms

Chinese telecom network providers missed the India 5G testing opportunity. Two Chinese equipment majors, which once had a significant share in the Indian market, had to remain on the fringes even as 5G testing went ahead successfully.

Before the 2021 bidding, the government amended the telecom licensing rules, making it mandatory to procure equipment only from 'trusted sources' approved by the National Cybersecurity Coordinator. But India's decision to bar Chinese companies was not founded solely on nationalistic foundations. A government source says there have been deep concerns about China's National Intelligence Law, 2017.

Under the law, Chinese companies are mandated to share data with the government to support the state's intelligence-gathering activities. Article 7 of the law compels business entities registered or operating in China to hand over information to Chinese intelligence agency — Ministry of State Security. Article 10 makes it applicable globally. With this, tech companies operating in foreign jurisdictions were to hand over user data to the Chinese state. While the Donald Trump administration saw it as a potential spying tool, India first dilly-dallied, banning China from 5G testing in 2018, but allowed them in 2019. Subsequently, it alienated them from the 5G testing process in 2021.

India's 5G testing went on smoothly with telecom players partnering with Ericsson (Sweden), Nokia (Finland) Samsung (South Korea) and the indigenous C-DoT. Both the government and the private sector did not budge from their stand even though eliminating the Chinese companies made 5G testing about 20% costlier, according to industry estimates.

Interestingly, India has banned use of Chinese equipment and components in manufacturing of domestic surveillance systems and drones to ring-fence military data from security loopholes.

New Chinese Laws

It is evident India's policies on business ties and on the strategic front are aimed at restricting Chinese influence on Indian economy. But what is going on inside China is equally important. That warrants a sneak peek into yet another law — the counter espionage law, which is badly affecting business sentiments in Chinese economy over and above the zero Covid policy (since relaxed) that had a lasting impact on industry and global investments into the Chinese economy. Section 8 of Anti-Espionage Law adopted at Chinese Communist Party's 12th National People's Congress in November 2014, and revised at 14th National People's Congress on April 26, 2023, says all citizens and organisations need to support and assist counter-espionage efforts, and shall protect state secrets and secrets of counter-espionage efforts that they are aware of. This has made companies jittery and investors are developing cold feet.

In a recent report, China's European Union Chamber of Commerce (EUCC) has highlighted that companies in China are uneasy due to issues such as security controls, state support to domestic firms and reforms limbo. Ahead of the release of the report in June this year, European Chamber president Jens Eskelund said on business confidence in China, "It is pretty much the lowest we have on record." The China way has been of subsidies and trade barriers, often in contravention to bilateral/multilateral free-trade commitments. According to a EUCC survey — European Business in China Business Confidence Survey 2023 — 64% respondents said doing business in China became more difficult in the past year, the highest on record.

Foreign investment in China also hit its nadir during April-June at $4.9 billion, registering a steep 87% decline year-on-year, the largest since 1998.

The India Strategy

Declining global interest in China is an opportunity for other nations, including India, provided it capitalises on the opportunity.

India has success stories in toys and specialty chemicals. Data reveals how domestic manufacturing is leading to import substitution. Toy imports from China have halved in four years to $218.9 million in FY23 from $451.7 million in FY19. Total toy imports have come down from $645.6 million in 2019 to $380.1 million, while exports have risen to $422 million in FY22 from $291.8 million in FY21. Total petrochemical production has gone up from 36,813 million tonnes (MT) in FY18 to 44,589 MT in FY22, an increase of 7,776 MT in last four years.

According to Global Trade Research Initiative, many Chinese imports have seen a decline. Medical equipment imports declined 13.6% to $2.2 billion in FY23 compared with FY22. Import of laptops, PCs declined 23.1% to $4.1 billion, while cellphone imports fell 4.1% to $857 million. Urea and other fertiliser imports, too, declined 26% YoY to $2.3 billion in FY23.

India is now building local manufacturing in various sectors through the PLI scheme, while creating large infrastructure. It is also aggressively searching for lithium mining — an ingredient dominated by China essential for success of the digital economy. For tapping digital economy opportunities, the government passed the Mines and Minerals (Development and Regulation) Amendment Bill, 2023, to ease approval process for lithium mines. It comes after potentially large lithium deposits were discovered in various parts of the country earlier this year.

Till June 2023, 733 PLI applications have been approved in 14 sectors with expected investment of ₹3.65 lakh crore, according to data from the Ministry of Commerce and Industry. Investment of ₹62,500 crore has been realised till March 2023, leading to incremental production/sales of over ₹6.75 lakh crore, while creating 3.25 lakh jobs. The PLI schemes have also boosted exports by ₹2.56 lakh crore till FY23.

Where Is The Economic Blockade Headed?

Developments in the last three years make it clear that India's efforts to find a balance with China will continue. The measures taken are not symbolic but backed by unambiguous policy.

So, where is this tussle with China headed? On the economy front, India is pushing forth an import substitution strategy and going ahead with its chip manufacturing and PLI scheme. Despite India's measures, the trade deficit with China is widening, at $82 billion in FY23 against $73.25 billion in FY22. Government think-tank Niti Aayog is working on a plan to lower dependence of India's supply chains on China — a move targeted at narrowing the trade deficit. A final recommendation on measures, including tariff barriers and regulatory rejigs, will be submitted to the government in the next six months.

India's push-back to China will play out in the long haul and its success hinges on the PLI scheme. "The idea is to replace Chinese products with local production. The success of the strategy we are following with China is critically dependent on PLI," says Dhar.

The initial din of the 2020 anti-China sentiment is not settling and a more pragmatic view is being taken. "We are not interfering with trade, a large part of which is imports serving as intermediary for exports. It is a practical pragmatic view," says Sibal.

"There is a sense of realism that it is not possible to decouple from China. As revealed by trade figures, imports have been rising. That brought us to being more selective. The government is not banning Chinese investments but screening them," adds Dhar.

For now, India is moving ahead with its semiconductor plan, having embarked on the Indian Semiconductor Mission, which aims to enable India's emergence as a global hub for electronics manufacturing and design. In 2021, the Cabinet approved the Semicon India programme worth ₹76,000 crore for sustainable semiconductor and display ecosystem. U.S. and Indian firms are collaborating on building units in India.

The opportunity is huge. Indian semiconductor demand is likely to touch $55 billion by 2026. Given the rapid growth of India's consumption economy, electronic imports are projected to overtake crude oil imports (which will reduce over time due to energy transition to renewables) as the biggest source of forex depletion. In FY23, India's crude import bill was $241.4 billion, while electronic goods worth $61.1 billion were imported.

But then, China is not expected to remain a silent observer. Sibal says China has always tried to block India's emergence in every possible way. On July 3 this year, China imposed export curbs on chip-making metals — germanium and gallium, on grounds of national security. The Chinese commerce ministry has now made it mandatory for exporters to identify importers and end use of metals for procuring a licence to export. "We are very actively trying to draw supply chains away from China, about which, it is very worried," adds Sibal.

On the geo-strategic front, India favours a multi-polar Asia. That said, only India and China have the potential to become major Asian poles, going ahead. Japan has limited military capacity. The only nations that go beyond Asia are China and India. Both want to lead the global South in their own way. China's BRI, launched in 2013, is a step in that direction. China-India competition transcends Asia and involves the global South, where China has tried to block India's emergence. To counter India strategically, it has penetrated Sri Lanka, Nepal, the Maldives and Bangladesh. And it is here that the IMEC comes into play.

The IMEC aims at unlocking investment for infrastructure development and strengthening connectivity between India, Middle East and Europe. "The IMEC comprises an Eastern Corridor connecting India to the Gulf region and a Northern Corridor connecting the Gulf region to Europe. It will include a railway and ship-rail transit network and road transport routes," the PMO said in a release. An MoU on the IMEC has been signed by India, USA, Saudi Arabia, UAE, European Union, Italy, France and Germany.

Mahajan points out that the BRI is nothing but a debt diplomacy tool for China, and the opportunity for India is to provide a credible alternative to the BRI which is fast losing steam. Burdened with debt that it's unable to service, Sri Lanka granted China a 99-year lease on its Hambantota port. Italy, meanwhile, is planning to exit the BRI.

So, how can India maximise its opportunities amid the big push-back? The game of strategy and counter strategy will continue and one will have to negotiate a way through it, according to experts. "China has blocked us in the U.N. Security Council. It is the only country that has not supported India’s permanent membership and will do everything to block it. It has blocked our entry into the nuclear suppliers group. Wherever possible, China tries to limit our role, regionally and internationally. It is a dimension of the China challenge that India faces," he adds.

"Strengthen ties with the U.S. and build capacity in advanced technologies and areas where China is making big strides. We must leverage 5G, 6G opportunities, quantum computing, robotics, and anything that is on the table with the Quad nations to deal with China. China-Europe relations are unsteady now. We can profit from it. Therefore FTA with the E.U. assumes significance. India should try to expand the IMEC by roping in Indonesia and Australia. It also needs to counter China in BRICS and Shanghai Cooperation Organisation. In all this, it is very important that Russia values ties with India," adds Sibal.

India's push-back to China is unprecedented. It seems to have kick-started its journey towards an Asian economic force, and a voice for the global south. However, the key to becoming a country having its own strategic and economic space will depend on how robustly India can grow its economy.