Opinion Discomforts with China

China’s rise as an economic superpower has been a source of concern for the West and for neighbours like India. The accusation levelled against China is that it has not played fair on the economic battlefield. Through a combination of artificially undervalued exchange rates,subsidies to state enterprises routed through its state-controlled banking system,rigid wage controls and dubious trade practices,it has decimated one industry after another in competing economies.

Things have changed over the last three years. Wages have increased,international pressure has forced it to ease its draconian control on the exchange rate. The possibility of its financial system imploding has forced it to reconsider its usual policy of using massive doses of credit to ward off any downturns in its business cycle. Rising political and social tensions,underpinned by growing inequality,have forced China’s politicians to focus more on domestic markets and buttressing domestic consumption,instead of devoting all their attention to exports. While this transition in its basic economic model is incomplete,it has slowed growth to 7-8 per cent for a while to come.

With its economic momentum slowing,Chinese politicians appear to be repackaging the Chinese dream through a mix of strident nationalism and regional authoritarianism based on military might. It seems to be a throwback to the days of imperial China. The fracas with Japan over the disputed Senkaku/Diaoyu islands in the East China Sea is an example of China’s new military adventurism. The recent military incursion into Indian territory is yet another.

For India,this presents a massive economic and business opportunity. China has been among the biggest recipients of global FDI. In 2012 alone,it received $112 billion. This could change in future. The world,particularly the US and Japan,seem deeply troubled by China’s rising nationalism and its aspirations to hegemony in the Asia-Pacific region.

Japanese and American commercial interests are re-evaluating China,appraising the impact of concentration,uncertainty and geopolitics. They are,in fact,looking at alternatives and India is a major destination under consideration. We need to get our act together as this is a big opportunity to get FDI to meet our capital and employment needs. We must make the Japanese comfortable and the Americans enthusiastic.

While China’s shifting political and foreign policy stances (and associated geopolitical risks) affect its viability as an investment destination,there are economic considerations like rising wages and an appreciating currency that justify a shift away from China. Recent surveys show average industrial wages in China,at $300 a month,are the highest in the region. Despite inflation and the shortage of skilled workers,India’s average organised-sector wage level,at about $270 a month,is still considerably behind China’s. Besides,unlike the Chinese yuan,which is likely to appreciate further,the Indian rupee could see a period of sustained depreciation,making the manufacturing sector that much more competitive.

Capital scours the world and India does have competition. Indonesia’s average industrial wage is lower than $200 a month,Vietnam’s is even lower. However,two things work for India. First,it has a much larger labour pool and this is likely to put a lid on long-term wage inflation. Second,the large and young labour pool offers huge market opportunities that our smaller Asian peers lack.

China’s regional ambitions alone cannot pull FDI into India. The investment environment has to improve and this involves not just improvement in infrastructure but also a better regulatory and policy environment. We cannot afford to forget that while China ranks 91 in the World Bank’s much quoted “Ease of doing business” survey,India ranks 132. Besides,there has been growing concern among potential investors about the instability of our policy regime in areas ranging from telecom licence allocations to tax policy. All this needs to be addressed before we can even aspire to benefit from FDI flows switching away from China.

Apart from FDI,there are sector-specific opportunities from the growing discomfort with China. Iconic US concerns such as Apple,The New York Times and defence giant Lockheed Martin have been infiltrated by Chinese hackers. There are also unconfirmed reports that most important federal institutions,including the Pentagon,have fallen prey to Chinese cyber-attacks. Both the American political establishment and American business would be interested in building a cyber shield to protect themselves,much like the way that the construction of a missile shield became the cornerstone of American defence policy during the Cold War. India,with its IT expertise,could be a key partner in building this cyber-defence mechanism.

China’s growing military adventurism perhaps warrants a shift in our defence strategy as well. Through a combination of economic and military support,it has aligned itself with India’s neighbours — be it Pakistan,Myanmar or Sri Lanka — leaving us somewhat isolated. India’s strategic response has been to move closer to the US and leverage American influence in the region.

It is possible to argue we should go a step further to counter China’s hegemony. One option is to align ourselves more closely with Nato,perhaps even consider formally joining it. This would strengthen our military status vis-a-vis both China and Pakistan. There have incidentally been overtures from Nato to forge a closer relationship with India. In September 2011,India was invited to join the ballistic missile defence programme as a partner. The US Nato ambassador,Ivo Daalder,has even suggested that India should turn away from its non-aligned role and join Nato. India has reciprocated partially by supporting Nato’s stance on Syria and Iran. Much more can be done on this front.

We must also fortify our economic ramparts with China. One thing that stares us in the face is the imbalance in trade. In 2011-12,we sold goods worth $18 billion to China and bought $57.5 billion,which meant a whopping trade deficit of $40 billion, up from $16.2 billion in 2007-08. There are a number of ways in which our trade relationship with China could be hurting our economy. At one end of the spectrum,imports of cheap capital goods,particularly power equipment (currently without duty) threatens the survival of our domestic capital goods companies. A similar situation has arisen with iron,steel and organic chemicals,in which Indian manufacturers have historically had a comparative advantage. At the other end of the spectrum,imports of smaller consumer items (plastics,toys,crackers,food) might not constitute the bulk of imports from China,but at about $5 billion they are significant in absolute terms. These directly compete with our SME sector,which is the biggest employer in manufacturing. These imports constitute a significant risk for our labour markets,with concomitant risks for political and social stability.

It is time we built stronger safeguards against the flood of imports from China. One option is to raise import tariffs on some items,which in most cases are way below the bindings we have committed to at the WTO. The Arun Maira Committee has recommended increasing the import duty on power equipment to 14 per cent. Second,we must be more vigilant about unfair trade practices such as dumping and use the extant forums of redressal to fight the flow of subsidised exports. An alternative is increased exports to China.

China’s rising military ambitions along with its aspirations for economic hegemony constitute both risks and opportunities for India. To both guard against these risks and exploit the opportunities,a number of changes are required in our economic and strategic policy. We have to reconsider our existing positions,such as non-alignment or free-trade,to ensure this.

The writer is chief executive officer of HDFC Bank

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