Chinese investments in South Asia

Amit Bhandari, Fellow, Energy and Environment Studies Blaise Fernandes, Director and President & CEO, Indian Music Industry

Ambika Khanna, Senior Researcher, International Law Studies

Disclaimer

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• To understand recent changes to India’s FDI policy

• To understand China’s economic footprint in India

• To understand China’s economic footprint in rest of South Asia

• To understand the Belt & Road Initiative

• To understand China’s long term objectives

Objectives of this session

• Issued in April 2020

• Any FDI by a person or company based in a country that shares a land border with India requires government approval

• Understood to be directed largely at Chinese investors

Press Note 3: 2020

• To prevent distress sales of Indian companies due to COVID-19 financial crisis

• To prevent takeover by stealth of critical sectors of the Indian economy

• Difficult for private firms to compete with China’s state backed national champions

• Lack of reciprocal market access by China:• non-tariff barriers

• lack of IP protection

Why was the FDI policy modified

• Entity/ person who is the final recipient of the returns of an investment.

• How is beneficial ownership determined? • Percentage shares held by a person holding• Control or influence, such as board position or operational control

• How is beneficial ownership determined in India?• Companies Act: 10% shares; or control/ influence• Prevention of Money Laundering Act: Ultimate ownership or

control• SEBI: Person that ultimately owns/controls/influences

• Facilitated by limited disclosure norms

Concept of Beneficial Ownership

It is not just India…

The Committee on Foreign Investment in the United States (CFIUS) reviews certain investments for their impact on national security

Monitors all incoming foreign investments

Scrutiny of investments in health and critical goods and services

Reduced non-EU investments from 25% to 10%

• Comprehensive study of Chinese investments in India

• Physical, Digital & Financial investments

• Information on over 150 investments across India

• First published in Feb 2020

Chinese investments in India

• Investments clustered around Delhi, Mumbai & Bangalore

• Start-up investments dominate all others

• Chinese Apps like TikTok feature among top apps used in India

Chinese investments in start-ups and apps

Key Findings

• China’s role in Indian economy smaller than rest of South Asia

• Official figures understate the actual extent of Chinese investments in India

• Investment in virtual assets exceeds ‘hard’ assets

• 18 of 30 Indian unicorns have a Chinese investor

India’s Incoming FDI: Major Sources

Rank Total FDI

(in $ Billion)

% of Total

Mauritius 1 140.8 31.6%

Singapore 2 91.0 20.4%

Japan 3 32.1 7.19%

Netherlands 4 29.7 6.65

USA 5 27.7 6.21

China (incl. HK &

Taiwan)

11 6.74 1.51%

Chinese investments in Indian Startups

• Bulk investments in startups• 93 in startups out of total 135 Chinese investments

• Two categories of investors• Dedicated VC funds like CDH, Hillhouse, Ward Ferry and SAIF Partners, mostly HK based

• Business Operators like Alibaba (10), Tencent (12), Xiaomi (17), Fosun (8)

• Investments in Ecommerce (28), Fintech (17) & Media (18)• For small investments, reach can be out of proportion

• No common investments between Alibaba & Tencent• Indicates investments are not just financial but strategic

Graphic credits: Deccan Herald

Success factors

• Absence of domestic venture funding• No domestic options for startups seeking $50 million

or more

• Chinese deep pockets and patience, eco-system support• Indian unicorns run big losses, require regular capital

infusion• Softbank/Sequoia require exit, unlike

Alibaba/Amazon

• Heavy Chinese smart phone penetration in India• Enables pre-loaded apps/recommended apps

• Over $500 million invested by 5 companies• Great Wall Auto buying out GM factories

• Riding on foreign brands/acquisitions• Chinese car brands not aspirational

• Entry via better known Western brands: MG, Volvo and Benelli

• Banking on shift to EVs• BYD (electric buses)

After Tech, Auto?

• MIC 2025 targets 10 strategic industries where China wants to be a leader• Information Technology, Aviation, New energy

vehicles, New Materials etc.

• Provides chosen sectors with preferential access to capital

• Aims to leverage the power of state to alter global competitive dynamics

Made in China 2025 (MIC 2025)

• Comprehensive study of Chinese investments in India’s neighbourhood

• Over 400 projects across 6 countries, based on primary data

• First published in Feb 2018, currently being updated

Chinese investments in India’s neighbourhood

• Proposed in 2013, added to CCP Constitution in Oct ’17

• A network of railways, roads & pipelines to connect China, Central Asia, South Asia and Europe

• Aims to create a China Centered Global Trading network

• Strategic and Economic Drivers

• Coincides with China’s increasing assertiveness

Belt and Road Initiative

• Ports, Roads, Railways, Thermal Power

• Capacity built in excess of needs - $1.3 bnHambantota Port, minimal traffic – now on 99-year lease

• $8 bn owed to China – 1/3rd of Sri Lanka’s foreign debt – at Libor + 3%

• Fresh borrowings - $989 million for highway to Hambantota

• 11% of tourist inflows from China

• Complete Economic dependence

Sri Lanka: Debt Trap Diplomacy

• $62 billion planned projects: power, roads, railway, port & urban infra

• 78% of ongoing & completed projects in power sector

• Over-capacity, high interest rates & cost over-runs have caused a crisis

• Undergoing IMF package, asked for debt relief

Chinese Investments in Pakistan: Power & More

Security, not economic benefit

• Management taken over from Singapore by Chinese govt firm

• Focus of multiple projects , core of current investments worth $1.2 billion

• Ostensibly a bypass to Malacca for China and alternative to Karachi

• Cost of moving oil via Gwadar >$8/bbl, vs $2-3/bbl for ships

• Limited economic potential for both, strategic location close to Hormuz Straits, Chabahar, Jamnagar

• 65% of India’s oil imports pass through Hormuz Straits

Security: Spotlight on Gwadar Port

Gwadar: trade hub or military asset?

• Coup in 2012, President forced out: Constitution amended in 2015 to allow foreign ownership of Islands

• Chinese investments worth >$1 billion

• New government came in promising transparency

• China owned island being expanded artificially – possible outpost/base?

The Maldives: Investments undermine Democracy

The Maldives: Military Base Coming up?

• Atoll of Feydhoo Finholhu expanded from 38 hectares to 100-ha

• Extensive experience of building & militarizing artificial islands in South China Sea

• Artificial islands cannot serve as tourist destinations

• No questions asked – unlike WB/ADB• Padma Bridge Rail Link (Bangladesh) – dropped by WB, now China funded

• Overcapacity• Power projects in Pakistan, Hambantota Port/Airport, Gwadar Port

• Padded Costs• Kyauk Pyu Port, Malaysia high speed railway – Cost reduced by over 75%

• High Interest Rates• Sri Lanka loans at Libor + 3%• Pakistan loans at Libor + 4%• WB/ADB lending is Libor + 0.5%

• Debt becomes Equity, Military follows economic presence• Djibouti• Hambantota, Gwadar – soon to be?

BRI: How it works?

• Willingness to deal with sanctioned governments• Myanmar, Pakistan

• Relations built on military to military ties• Leading weapons supplier to Pakistan, Myanmar, Sri Lanka and Bangladesh

• Unrealistic expectations of transparency/probity• Padma Bridge Rail Link (Bangladesh)

• Unrealistic expectation on environmental norms• Thermal power in Pakistan, Bangladesh

BRI: How it works?

• Silence foreign criticism using economic muscle• Beef imports banned after Australia speaks of investigating Covid-19• Salmon imports from Norway halted after Nobel prize to dissident• Tourist arrivals to Philippines, Palau, South Korea shut off at various times

• Export Chinese standards for key industries • 5G, electric vehicles, power generation

• Dominate South China Sea (SCS) militarily, displace the US entirely from SCS• 9-Dash line, claiming almost all of SCS as China’s sovereign territory• Artificial Islands, now become military bases• Repeated confrontations with Japan, Vietnam

• Replace the US Dollar as the global medium of exchange• Has created institutions to rival IMF, WB, ADB• Is trying to shift trade (including oil) to the Yuan

China’s Long Game

Thank you