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On April 1st, 1950, India became the first non-socialist country in Asia to establish diplomatic relations with China. This year marks the 70th anniversary of that date, but ironically, the milestone coincided with the deadliest clash since 1975.
Tensions between the world’s two largest populations and fastest growing major economies have been high since the Himalayan border conflict in June with 20 Indian soldiers reported dead and occurrence of unreported Chinese casualties. Five rounds of diplomatic talks have been held regarding the Line of Action standoff since and whilst there is a “consensus” to disengage, no breakthroughs have been made as yet according to news reported by The Times of India. Coupled together with one of the worst health catastrophes in recent decades, we take a look at how Chinese businesses were affected.
China and India’s Economic Relationship
India has been able to maintain a growth of exports to Mainland China, reaching a total of over 5.3 percent of total exports in the financial year of 2019. However, more than 13.7 percent of imports into India are from Mainland China. The numbers show that India runs a big trade deficit with China. As pointed out to state-run China Daily by Indian ambassador to China Vikram Misri in 2019, “that kind of deficit is not economically sustainable, and it can also become politically sensitive if we don’t take steps to address the deficit.” Figures released by India’s Department of Commerce show that China was surpassed by the US as India’s largest trading partner in 2018-2019, having held the first position for four years running.
Referring to India’s Department of Industry and Internal Trade’s (DPIIT) FDI statistics, China only represented under one percent of total inflow in the past two decades. This seems highly insignificant for the second largest economy with such strong trade relations. However, when we look at the smartphone and tech industry, we see a very different picture being painted.
In the 2019 McKinsey Global Institute report Digital India, it is estimated that the number of smartphones in India will double by 2023 to hit 650 – 700 million. Counterpoint’s research analysis states that 72 percent belongs to Chinese manufacturers with Xiaomi leading the charge. Not only do we see a deep infiltration in the mobile hardware sector, the same is observed in the software side. According to Gateway House, out of the 30 unicorns in India (start-ups with valuation over $1 billion), 18 of them are backed by Chinese investors. This would be alarming for any country, with security and control concerns being of paramount importance and also became a major factor in subsequent moves from the Indian government.
FDI Control, #BoycottChina and App Ban
In March and April, as the pandemic worsened in India and the lockdown started, share prices began to fall. Shares of HDFC bank, the largest bank in India by market capitalization fell almost 40 percent from its high in 2020. On April 14th, days after China’s central bank PBOC raised its stake in HDFC, the trade ministry announced a change to FDI policies and said that “the government has reviewed the extant foreign direct investment policy for curbing opportunistic acquisitions of Indian companies due to the current COVID-19 pandemic.” All entities in border nations were then required to seek approval of the Government of India before investing in any Indian entities.
Of the seven border sharing nations, Afghanistan, Bangladesh, Bhutan, China, Myanmar, Nepal and Pakistan, there were no direct investments from Myanmar and Pakistan. The sum of FDI in the past 20 years of the remaining countries excluding China was less than 10 million USD. These figures gave rise to calls that China was being targeted.
Shortly after the Himalayan border clash on June 15th, anti-Chinese sentiment was at its highest. The #BoycottChina movement became prevalent and many Indian businesses and individuals started to voice and show their displeasure. Within a week, Bloomberg reported that the DPIIT summoned a dozen online retailers to a video conference meeting including Amazon and Walmart, where they agreed to compel merchants to display “country of origin” for all goods sold online in India.
On June 29th, India’s Ministry of Electronics and Information Technology announced the ban of 59 Chinese applications (apps), “upon receiving of recent credible inputs that such apps pose threat to sovereignty and integrity of India, the Government of India has decided to disallow the usage of certain apps used in both mobile and non-mobile Internet-enabled devices.” Further bans of apps were made since, and till date, 224 Chinese apps have been banned in India.
The Deal Breaker for Chinese Businesses
Despite having problems that many business professionals are struggling with such as the highest frequency of late payments and proportion of uncollectable B2B receivables in Asia-Pacific, the worst air pollution in the world, relatively poor infrastructure for domestic logistics, paper-thin margins and difficulty in monetization; prior to the pandemic, India was viewed by Chinese businesses as a country with very promising prospects. With the second largest population in the world, one of the fastest growing economies and with the government moving to ease red tape and increase benefits for incoming businesses, many Chinese businesses were prepared for the long battle as the benefits outweigh the risks. Even FDI regulations did not slow SMEs down as they found other ways and means of bringing their investments into India. The onset of #BoycottChina and the announcement of banning apps however, changed things.
Being a Singaporean Chinese working in India, I was rather taken aback by the anti-Chinese sentiments I saw on social media at the start of the #BoycottChina movement. According to some of the Chinese businessmen I work with, their goods were stuck at the Chinese ports with logistics ceased, and even goods that had arrived in India were held up at customs with checks becoming more stringent. Changes in regulations were happening every few days and there were a lot of uncertainties. I was fortunate to have been in Singapore at the onset of the pandemic, but my friends in India talked about the start of anti-China demonstrations, and Chinese businesses or even businesses related to Chinese products were heavily affected. According to multiple news reports including Reuters, Indians of Chinese descent were even attacked due to their Chinese facial features. Needless to say, the few Chinese that did not leave due to the pandemic were fearful of even being seen in public during that time.
With the ban in apps came a turnaround in viewpoint. The long battle became an instant defeat for many Chinese tech companies. Of the Chinese friends I had in India from before the pandemic till now, only less than 10 percent remain. The Head of India for a listed tech company who has to remain anonymous due to company regulations told me that most of the Chinese businesses he knows, including his own company, are already either giving up on India and focusing on other markets or drastically shrinking the size of their operations in India.
The attractiveness of the business landscape for Chinese businesses in India has definitely changed as a result of the deteriorating relations between China and India. With the banning of Chinese apps, comes the inevitable exodus of many Chinese tech companies but this in turn presents opportunities for both the US as well as Indian homegrown tech businesses. The question now would be when the restrictions will be lifted if ever, and if it does, will Chinese companies return and give India another chance?
This article is written by Zhe Loy, Senior Editor at 86insider.