China Vs India in the Global Market- An Indian Perspective

By D.S.Rajan

“ All countries must compete in global markets and such competition is not inconsistent with cooperation nor is it adversarial” – Dr Manmohan Singh, Prime Minister of India.[1

“ China and India are cooperative partners instead of rivals. They have common interests in the global economic and trade system”- Wen Jiabao, Premier of the State Council of the People’s Republic of China (PRC).[2

The two statements above amply reflect the resolve of China and India to keep their competition in the global markets non-adversarial, which in fact constitutes a component of a bigger picture showing the readiness of the two powers to display a spirit of cooperation with respect to their overall bilateral relations. To illustrate, Beijing has stated [3] that ‘disagreements’ should not stop China and India from establishing a ‘stronger’ relationship and New Delhi has stressed [4] that the two nations have ‘maturity and wisdom’ to deal with any ‘differences’.

To begin with, the question ‘ why the competition’ needs to be addressed. As they develop fast, both China and India need raw materials to keep their fast growing economies on the track; however, facing shortage in this respect domestically, they are naturally looking towards global markets for getting access to resources. A competition between the two looks inevitable as they perforce are targeting the same resource-rich regions.

Are China and India equal competitors? The answer is a clear no, considering the asymmetry in the economic strengths of the two, with China much above India. The PRC, which occupied only 10th position in the world economies till some years back, is now the second-largest global economy, surpassing Japan.[5] As China’s economy advances rapidly, the country’s political clout in the globe is increasing; a powerful China is impacting on the Asian power balance in particular. It is predicted that by the year 2035, China may surpass the US as the largest economy in the world and India may do so in 2040.[6]

China’s achievements made since the year 1978, when reforms began, has been unprecedented for a developing nation, with 10% average annual growth in the last three decades[7]. The World Bank expects China to grow by 9.5% to 10% in 2010 and by 8.5% to 8.7% in 2011[8]. Other estimates [9] show that by 2020, China will have completed its transformation from the “world’s factory” to the world’s biggest market of both consumer and industrial products and that its present nominal GDP of about US$ 5.7 trillion will grow three times by that time. A key question will be when China will be able to improve its per capita GDP; it is at the low level of US$ 3750 now, making the country to rank 104th in the world. Also not clear is whether the PRC can achieve ultimate success in overcoming its major economic challenge of uneven development, notwithstanding the government’s well-intentioned shift of policy focus from GDP-centric growth to achieving a balanced development in the country. Beijing’s current vision is for achieving a ‘sustained development’ through economic restructuring. Meanwhile, in a step seen as signifying a paradigm shift in the country’s growth model, the PRC has begun to implement a new “ National Medium and Long Term Talent Development Plan (2010-2020)”, aimed at creating a highly skilled work force in 10 years, capable of transforming the country’s investment-driven economy into a talent-driven one. The plan seeks to change China’s status from a manufacturing hub to a world leader in innovation by 2020.[10]

In comparison, India’s economic performance has not been less impressive. India’s average growth in last 10 years has been 7.3%; it is predicted that India’s growth can outpace that of the PRC in 2013-15, equalling with the latter in per capita terms by next 10 to 11 years, thanks to India’s demographic advantage and efforts towards structural reforms[11]. Projections also indicate [12] that India’s nominal GDP reached US$ 1.22 trillion in 2008-2009; it may grow by 9% to 10% annually further. Like in the case of China, India’s per capita GDP of US$ 1400 is also low in terms of the levels of the advanced countries. India’s savings and investment rate is 35% of the GDP and is rising.

Between China and India, the latter as of now ranks below the PRC in terms of global competitiveness. In the Global Competitiveness Report (2010-2011) of the World Economic Forum, which assesses the performance of nations with respect to 12 key indicators including institutions, infrastructure, macro-economic development and technological capabilities, India occupies 51st position as against China’s 27th.

The ascendancy of China and India is taking place under conditions of a congruence of their strategic interests emerged out of aspirations of both to modernise– for the two, development has become the common goal and to achieve it, they feel that a peaceful international and peripheral situation is a must. Such thinking has in fact motivated them to establish a Sino-Indian ‘Strategic and Cooperative Partnership for Peace and Prosperity’. Nevertheless, the ‘partnership’ should not be taken to mean that there can be no clash between self-interests and geo-political considerations of each; this provides the rationale for the competition-cooperation interplay, which is characterising their ties in general and with respect to their roles in the global market in particular. On one side a competition between them is taking place for resources worldwide, on the other they are coordinating positions on major international issues like climate change, reform of international financial system, Doha round of trade talks, multi- polar world and globalisation process. Specifically on the energy front, China and India have expressed willingness to cooperate, symbolising which is their agreement reached in 2005 for bilateral cooperation to explore and exploit oil and natural gas resources in other countries. Another example of cooperation is Premier Wen’s statement[13] in India welcoming Indian software companies to set up operations in China for tapping Chinese and global markets.

China, as a player in global markets, has definitely established an edge over India. The former’s greatest advantage lies in its superiority in the manufacturing sector, which now contributes to 50% of the country’s GDP, amounting to US$ 650 billion per year, in comparison to India’s 25% and US$ 110 billion respectively[14]. Production costs in China remain low and the Chinese companies are now engaged in higher value-added activities such as product design and development, technical services and supply chain operations. Especially, they are moving into high technology sector, the share of which in exports is increasing, raising the chances of China’s catching up with the US in this regard.[15] It is estimated that China’s share of world high technology exports has increased from 6% in 1995 to 20% in 2008. [16] Importantly, as the year 2009 ended, the PRC has emerged as world’s largest exporter, overtaking Germany.[17

China however faces a distinct disadvantage – a shrinking working age population. According to Chinese State media[18], the year 2015 will mark the beginning of the end of the country’s demographic dividend. Studies[19] show that the number of Chinese people above the age of 60 is expected to reach the figure of 200 million by 2015. Also, about 10 million may retire from their work every year. Latest trends indicate that labour shortages are rising in China in part due to demographic changes, growing demand for higher wages and assertive work force, impacting negatively on the country’s competitiveness.[20] According to a survey,[21] due to China’s problem regarding working age population, the country may experience a fall in its GDP growth – 7.7% in 2015 and 6.7% in 2020.

Notwithstanding China’s economic edge over India, the latter’s strong points with respect to its role in the global market cannot be denied- emergence as a world services hub, a global technology and innovation centre, strong banking sector, educated middle class and demographic advantages vis-à-vis China. The International Monetary Fund forecasts that India’s growth will be 9.5% for Financial Year 2010.[22] Some assessments[23] say that with China suffering the problem of working age population, the chances of India with a vibrant youth work force, replacing the PRC as a global manufacturing hub, are bright.

China and India have revealed strategies to govern their global market roles. What is common to them is the priority accorded to the need for responding suitably to the falling external demand under the impact of the global financial crisis. Also, both the nations have announced ambitious long-term goals. China wants to make the country a strong trading power with a volume of US$ 5.3 trillion by the year 2030. On its part, India aims at doubling the country’s current share of 1.5% in global trade by the year 2020.

The PRC’s exports and foreign trade volume has come down by 16% and 13.9% respectively in 2009, first drop in 11 years and biggest fall since 1978. In response, the PRC’s policy paper entitled “China’s Foreign Trade Development Strategy in the Post-Crisis Era”, issued by the Ministry of Commerce on 10 April 2010, has concentrated on the urgent task of countering the likely pressure from reduced inventories worldwide and the euro zone debt crisis. It has laid emphasis on maintaining stability in foreign trade by addressing problems like increasing trade frictions and trade imbalances, upholding Yuan’s exchange rate stability and continuing tax rebates. It has envisioned that by 2030 the country will own a host of multinational corporations and world-class brands.[24]

The impact of China’s new foreign trade policy is already being felt at ground levels. Recognising that its exports to the US and Western nations are now coming down, China has begun to increase its trade volume with ASEAN, Africa, Russia and Brazil[25]. This shows a significant trend- the PRC is making efforts to diversify export destinations and lessen its market dependence on Western nations, which are suffering from low employment rates. Also interesting is China’s intention to internationalise its Yuan currency. It is expanding the Yuan-based cross-border trading under the perception that such trading can avoid foreign exchange rate risks and reduce operating costs involved in foreign exchange settlements.[26]

Coming to India’s Foreign Trade Policy (2009-2014), it also aims at countering the fall in external demand. It has noted that despite the robust growth in exports witnessed since 2003, the country’s exports have suffered a decline due to a contraction in demand in its traditional export markets, especially due to the protectionist measures being adopted by some countries abroad. In short term, the policy wants to arrest and reverse the declining trend of exports and provide additional support especially to those sectors which have been hit badly by recession in the developed world. It has set a target to achieve an annual export growth of 15% and an annual export target of US$ 200 billion by March 2011 as well as around 25% annual export growth by 2014.

The roles of China and India in the global markets require to be examined against the conditions mentioned above. First comes the competition between them for resources worldwide. As the two face continuing gap domestically between the resources supply and demand, it is natural that they compete to reach out to resource-rich nations in the world. The PRC became a net oil importer in 1993. By 2007, oil import had accounted for 50% of China’s total oil consumption; this is expected to reach 55% by 2010, 66% in 2020 and nearly 70% by 2030.[27] China is now the world’s second largest oil consumer after the United States.[28] Taking the case of India, it is now the fifth largest energy consumer in the world and is expected to reach the fourth position soon. By 2030, India is likely to surpass Japan and Russia to emerge as the world’s third largest energy consumer.[29] Imports now contribute to 70% of the oil consumed in India and by 2010; India’s dependence on foreign oil is projected to reach more than 90% by 2030, according to projections from th U.S. Department of Energy[30].

Chinese official documents[31] have indicated that from now on, the PRC’s foreign policy will be driven more and more by the need for resources – oil and natural gas, industrial and construction materials, foreign capital and technology. Accordingly, the PRC is encouraging its state-owned companies to reach exploration and supply agreements with resource-producing nations in the Middle East (Iran and Saudi Arabia), Central Asia (Kazakhstan), Russia, Africa (Sudan and Angola), Latin America (Venezuela and Brazil) and the Asia-Pacific region (Myanmar and South and East China seas). Simultaneously, Beijing is acting at state levels to influence such nations, which are getting manifested in four ways – conducting high-level diplomatic exchanges, promoting bilateral trade, extending economic aid especially for infrastructure building, and even providing military assistance. China is diversifying energy supply sources in response to perceived vulnerability to any over dependence in this regard on the politically volatile Middle East and Africa. Russia and Latin America have become China’s new markets.

What should be India’s response to China’s resource hunt worldwide? Taking Middle East first, New Delhi can match Beijing’s strategy by offering something more in return for oil, such as transfer of technology to the oil rich nations in the region. In Central Asia, ties with Kazakhstan will be important for India due to its strategic location in the Caspian Sea, considered third largest oil reserve in the world, also with potential Uranium deposits. In Africa, India’s foreign policy should become more resources based; fresh measures are necessary on India’s part as a sequel to its Africa summit in 2008. Energy ties with Russia are also crucial to India. Notable in this connection is the keenness expressed by India prior to the December 2010 visit by Russian President Medvedev, to establish a strategic energy partnership with Russia, based on nuclear energy and oil and gas[32]. At a time when China’s footprint is becoming stronger in Latin America, India can strengthen energy relations with emerging destinations in that region, with Venezuela in particular.

In South Asia, China’s competition with India for resources is closely intertwined with the former’s strategic initiatives; New Delhi suspects them as at the cost of India. Examples are Beijing’s uncompromising position on the border, policy towards Kashmir, stand on India’s UN Security Council permanent membership, Sino-Pakistan nexus and trade deficit. Especially, the PRC’s plans to build connectivity with Pakistan through road and rail links and talk of construction of an oil pipeline extending from Gwadar in Pakistan along the Karakorum highway to China via the Khunjerab Pass, are causing concerns in India. The moves clearly demonstrate Beijing’s priority to energy security with an eye on accessing oil rich Central Asia through Pakistan and reducing its traditional dependence on the piracy-prone sea routes; but India could be right in seeing strategic implications for it from Beijing’s evolving approach towards Kashmir issue signalling shedding of hitherto maintained neutrality on the question and a tilt in favour of Pakistan’s position. The PRC’s interest in the Indian Ocean, a vital transit route for its energy import sources from West Asia and Africa, falls under same category. Questions are being asked in India about the potentials of China’s port facilities, which have come up in the Indian Ocean littorals for being used for military purposes.

Another point meriting New Delhi’s attention is the ability shown by China to outpace India in South Asia in matters of trade. The fault seems to lie in India’s protectionist tendencies, pushing countries like Sri Lanka, Bangladesh, Nepal and Pakistan to lean towards China, which is prepared to extend development assistance to them. Also, China’s military ties with nations in India’s periphery are growing. No doubt, New Delhi needs to adopt an effective strategy to counter China’s increasing economic, political and military proximity to countries in India’s neighbourhood. New Delhi’s recent initiatives in Sri Lanka and Myanmar demonstrate India’s awareness of such need (for e.g. economic cooperation plans announced during the recent visit to Sri Lanka by India’s External Affairs Minister and India’s projects in Myanmar covering Kaladan river transportation and up gradation of Sitwe, a place for refuelling for China’s naval forces, to be connected to Eastern India ports).

In East Asia, India’s ongoing involvement under its Look East policy, is leading to its rivalry with the PRC. Though China has joined with India in supporting mutual cooperation within the framework of the East Asia Summit[33], authoritative media opinions in China have considered India as an outsider to the East Asia regional integration process. They in particular have raised a question whether India’s Look East Policy is meant to ‘encircle’ China.[34] Beijing’s goal in East Asia is based on establishment of a web of Free Trade Zones. China-ASEAN Free Trade Area (CAFTA) is operational since 1 January 2010. This is prompting India to come out with its own Free Trade Area strategy. An India-ASEAN Trade in Goods (TIG) Agreement has come into force on 1 January 2010. New Delhi is also keen to conclude early an India-ASEAN FTA in services and investment. India is fast cementing its economic, political and security collaboration with key East Asian nations like Vietnam, Cambodia, South Korea and Japan, which are wary of China’s growing assertiveness.

From a strategic point of view, it would be important for India to pay close attention to Beijing’s assigning the People’s Liberation Army (PLA) Navy the task of protecting the country’s maritime interests under the overall framework for energy security. Senior military officers in China have argued in favour of China setting up overseas bases facilitating protection of sea trade routes. For the first time since the founding the PRC in 1949, three PLA naval vessels participated in an operation outside the country in January 2009 – a UN sanctioned anti-piracy activity off the Horn of Africa. Also, vessels retired from the Navy are increasingly being pressed by China to patrol disputed South China Sea islands and the Senkakus claimed by Japan.[35] At policy levels, the PRC’s defence documents have begun to note the need for the armed forces to get involved in ensuring the country’s energy security, for e.g., its Defence white paper for 2006 referred to the ‘ongoing attempts to expand the ranges of PLA Navy and Air force’ and ‘mounting security issues relating to energy resources’. The 2008 Defence White Paper followed such sentiments by referring to ‘intensifying struggle for strategic resources’. Also on rise are official references to the PLA’s undertaking of ‘historic long term missions’ for protecting China’s territorial and maritime interests through acquiring aircraft carriers, next generation weapons etc. [36] India should not miss the apparent military angle while competing with China in the energy front. In any case, it is gratifying that both China and India are making efforts to discuss all the contentious issues through a dialogue Next to resources, India-China competition can spread soon to the IT outsourcing sector. China’s stated aim is to set up 10 international competitive outsourcing hubs, engage 100 multinational companies to outsource to China and develop 1000 outsourcing services vendors in China qualified to serve the global market. China’s challenge is likely to be felt in US and Europe, the traditional Indian strongholds in outsourcing[37]. A report of Chinese Ministry of Industry and Information Technology (14 October 2010)[38] has highlighted China’s outsourcing advantages like low labour costs and advanced IT technology, while noting that the US markets have become less dependent on Indian outsourcing companies.

Improving China-India trade and business relations can have a sobering effect on the global competition between the two countries. China is emerging as biggest trade partner of India. It now recognises India as one of China’s largest overseas engineering contract markets.[39] The PRC is showing interest in addressing the problem of trade deficit with India and opening China’s markets for India in pharmaceuticals, IT and agro-products. Both sides need to narrow down the existing differences in the matter of arriving at a bilateral free trade area agreement.

As the Chairman of the Deloitte Consulting LLP, the US-based leading world service organisation, Mr James H.Quigley puts it[40], it will not be in the interests of any country to have a 100% export-driven economy. In China, exports contribute to about 40% of the GDP, while in India the corresponding figure is 20%. Under the impact of global financial crisis, China has evolved long-term policy of reducing dependence on exports and boosting the domestic demand. In India, which is less exposed to exports, discussions seem to be strong on whether the country should have a similar policy. Such trends may have a bearing on future roles of China and India in global markets.

(The writer, D.S.Rajan, is Director, Chennai Centre for China Studies. The article is an updated version of the presentation on the subject made by the writer at the National Trade and Logistics Symposium, organised by the Indian Institute of Foreign Trade, Kolkata, on 17 November 2010. Email: [email protected]).

[1] Dr Manmohan Singh’s speech at India-China Economic, Trade and Investment Summit, Beijing, 14

January 2008

[2] Chinese Premier Wen Jiabao’s speech at India-China Business Cooperation Summit, New Delhi, 15

December 2010

[3] Wen Jiabao’s address at Indian Council of World Affairs, New Delhi on 16 December 2010

[4] Remarks of Indian Foreign Minister S.M.Krishna at Indian Council of World affairs, New Delhi,16

December 2010

[5] As per the data for second quarter of 2010 released by the Japanese Cabinet Office, Bloomberg

News, 16 August 2010

[6] “ When Will India and China Overtake US in GDP (nominal)? A study by Goldman Sachs,

www.ecojournal.com/2010/02/02

[7] “A Changing China in a Changing World”, Address by Chinese Foreign minister Yang Jiechi, at

Munich Security Conference, 5 Feb 2010

[8] World Bank Quarterly Update, 3 November 2010

[9] Morgan Stanley: “China’s Nominal GDP to Triple by 2020”, People’s Daily Online, 11

November 2010. Morgan Stanley recently published the Asian Bluebook saying that by the year

2020, China’s nominal GDP will triple, accounting for 14 % of the world’s total GDP, and its

fixed-asset investment and consumption will also surge.

[10] “China’s National development Plan”, Wang Huiyao, Brookings, Washington; ‘China Daily’,

14 September 2010

[11] Morgan Stanley forecast, www.business.rediff.com, dated 8 September 2010

[12] “Just Boycott Pakistan”, R.Vaidyanathan, Professor of Finance, Indian Institute of Management,

Bangalore , the Pioneer, 15 November 2010

[13] Wen Jiabao’s speech at India-China Business Cooperation Summit, New Delhi, 15 December 2010.

[14] www.wakeupcall.org/china- india comparison, 26 November 2010

[15] ‘China Overtakes US in Global Manufacturing Exports’, American Manufacturing Trade

Coalition Report, 18 June 2008.

[16] http://www.nsf.gov/statistics/seind10/c0/c0s11.htm, National Science Foundation, Science and

Engineering Indicators, Arlington, USA, January 2010

[17] ‘China’s exports rose 17.7% in December 2009, making the PRC as world’s biggest exporter’,

BBC 10 January 2010

[18] China’s ‘demographic dividend’ to decline in 2015, Global Times, 9 Sept 2010

[19] CCTV news, 7 November 2010

[20] The Hindu 14 December 2010

[21] 2010 Global Manufacturing Competitiveness Index, the Hindu, 2 December 2010

[22] “World Economic Outlook, 2010”, IMF, 8 October 2010

[23] Op-Ed commentary, Chris Devonshire Ellis, China Briefing, www.china-

briefing.com/news/2010/09/2

[24] www.china.org.cn, dated 5 October 2010, People’s Daily Online 17 August 2010 and ‘Qiu Shi’,

17August 2010

[25] ‘China’s Foreign Trade’ in 2010, a Year of Recovery, www.china.org.cn 5 October 2010

[26] “Yuan cross- border trade to be expanded”, Global Times, 1 March 2010

[27] International Energy Agency (IEA) report 2004; China Daily, 28 April 2009

[28] As per data given by Economic Intelligence Unit (EIU), 2006

[29] ‘China and India Stoke Energy Bond’, Ma Jiali, China Daily, 2 February 2010

[30] www.wilsoncenter.org, Report for September 2008

[31] ‘Energy Security is center-piece of China’s foreign policy’, Report on Foreign Relations in 2008,

Russel Xiao, 18 July 2008,China Brief No.8/16, the James Town Foundation, 5 August

2008,quoting Wen Weipo of Hong Kong, 18 July 2008

[32] Interview of India’s External Affairs Minister S.M.Krishna to Russian Media on 20 December 2010

[33] India-China Joint Communiqué, New Delhi, 16 December 2010

[34] People’s Daily online, 27 October 2010

[35] ‘Impeccable’ Affair and Renewed Rivalry in South China Sea, Ian Storey, China Brief 9/9, 30 April

2009. Two Chinese maritime survey ships patrolled Senkakus on 8 December 2008 and March

2009, AFP 15 March 2009

[36] “ China says navy expansion no threat to others”, China Daily quoting PLA Navy Deputy chief

Maj. Gen. Zhang Deshun, 25 March 2009

[37] www.global servicemedia.com, 9 September 2010

[38] English.people’s daily.com.cn/90001/90776/90883/7167613.html

[39] Premier Wen at India-China business Cooperation Summit, New delhi, 15 december 2010.

[40] Times of India, 17 November 2010

SAAG

SAAG

SAAG is the South Asia Analysis Group, a non-profit, non-commercial think tank. The objective of SAAG is to advance strategic analysis and contribute to the expansion of knowledge of Indian and International security and promote public understanding.

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