The Chinese Encirclement: Within and Without

The recent geopolitical dispute highlights the fraught and schizophrenic nature of the India-China relationship

The recent border dispute has again raised the spectre of Chinese encirclement. It comes close on the heels of India’s boycott of the ambitious Belt and Road Initiative (BRI) summit in China. What is unfortunate, though, is that the dreaded encirclement may have already occurred and, if anything, the recent dispute highlights the fraught and schizophrenic nature of the India-China relationship.

The fresh skirmish at the tri-junction of India, Bhutan and China is part of on-going border tensions. The stand-off continues with both sides raising the temperature gradually, much like the dial on a thermostat; apart from incendiary statements, China recently increased its fleet presence in the Indian Ocean Region. In the past, many similar border misunderstandings were resolved quietly. The latest one burst into the headlines with impeccable timing during Prime Minister Narendra Modi’s visit to the US.

India ignored the BRI summit because it objects to the China Pakistan Economic Corridor (CPEC) which passes through Pakistan-occupied disputed territory. India’s contention is that CPEC is a unilateral validation of Pakistan’s claim on disputed territory. There are other reasons for India’s nervousness. China’s BRI is viewed as a strategic encirclement of India: Hambantota port in Sri Lanka, CPEC traversing west China via Gilgit-Baltistan all the way to Gwadar port in Balochistan, a road from Yunan province cutting through Myanmar to end at a deep-sea port in Kyaukpyu.

But, apart from the geopolitical squeeze, developments seem to indicate that a Chinese geo-economic encirclement may have already happened. While there is popular concern over the overwhelming presence of China-made idols of Indian gods or cheap toys, these are the proverbial iceberg’s tip. What seems to have gone unnoticed is an insidious China creep within the Indian trade, business and financial landscape.

News from the cricket world provides a glimpse: Chinese handset manufacturer Vivo won rights to cricket tournament Indian Premier League (IPL). Vivo will pay Rs2,199 crore for the next five years, which works out to 267% premium over base price of Rs120 crore a year. The next closest bidder was Oppo, which bid Rs1,430 crore for five years. Vivo’s bid is impressive, when compared to Oppo’s bid or the base price, or even amounts paid by previous sponsors (such as, DLF or Pepsi).

But it’s hard to miss the irony. Brands Vivo and Oppo are actually siblings and manufactured by the same Chinese company, BBK Electronics (which also owns brand One Plus). The IPL bidding process should have treated them as parties acting in concert, though that seems to have been overlooked in the general brouhaha over the money on the table. Chinese handset brands now command over 50% of the Indian smartphone market share.

Here’s another example. Chinese capital goods manufacturers have made deep inroads into India, with some critical sectors now highly dependent on Chinese spares and after-sales servicing. For instance, in the boiler-turbine-generator (BTG) segment, many Indian power producers have installed Chinese BTGs. In the 12th Plan alone, close to 30% of generating capacity was sourced from China, with the trend continuing in the 13th Plan as well. What tipped the scales, apart from shorter delivery windows, was cheap buyers’ credit (through Exim Bank of China), with installation crews and maintenance staff thrown in.

Chinese portfolio investors are the other angle in geo-economic encirclement. Among the list of banks managing the recent Central Depository Services Ltd initial public offering was a curious name: Haitong Securities India Pvt Ltd. Haitong, as per its website, is China’s second largest securities firm. Many of the firm’s senior management members hold, or have held in the past, organizational positions in the Communist Party of China. Haitong gained a toe-hold in the Indian market through its global acquisition of Espirito Santo. But, what is really interesting is that Haitong Securities was the book running lead manager in an IPO in which government-owned banks—State Bank of India and Bank of Baroda—were divesting their shareholding.

The Chinese footprint in the digital economy is also expanding rapidly. Numerous Chinese companies—Alibaba, Tencent, CTrip, Beijing Miteno Communication Technology, Bytedance—have made large investments in the Indian digital ecosystem, a mission-critical segment for Modi and his ministers.

India suffers a trade deficit with China which has increased over the years: from $38.7 billion in 2012-13 to $51 billion during 2016-17. One of the reasons for the large deficit are Chinese tariff and non-tariff barriers which constrain Indian exports; for example, Indian pharmaceutical exports have found it difficult to penetrate the Chinese market. Increased Chinese foreign direct investment was suggested to counter the rising trade deficit. But, there were no discussions on the nature of that investment: whether for manufacturing or for assembly jobs.

It would be hasty, and perhaps imprudent, to advocate slamming the doors or erecting barriers. But it is difficult to ignore the duality in rhetoric from both sides. The high decibel in security and strategic issues seems to be disengaged from trade and investment realities. One key question, therefore, needs to be answered: What kind of cost-benefit is involved in keeping engaged or in disengaging?

The above article was originally published in Mint newspaper and can also be read here