China is currently both India’s largest trading partner and fastest growing source of FDI. Despite this, the bulk of India’s governmental engagement with China occurs in the political sphere. In 2017, India-China political relations were dominated by two major events: the Doklam standoff and India’s boycott of the OBOR plan (now renamed as Belt and Road Initiative).
The Doklam incident was the second longest standoff between armies on both sides and was accompanied by bitter anti-India rhetoric in the Chinese press.
Hence, for most of 2017, it appeared as though both these events would severely impede the growth of Chinese investments in India, at least in the short term.
However, in reality, Chinese Outbound Direct Investment (ODI) in India actually outpaced its global growth rate in 2017. It also flowed in a concentrated manner into select sectors. This is a paradox that warrants further examination.
Chinese ODI in India
From 2014 onward, under Modi’s ‘Make in India’ campaign, Chinese companies have been courted in the hope that they will undertake much needed investments in large scale manufacturing in India and deploy low-cost capital to bridge India’s “infrastructure deficit”.
These overtures have also been complemented by ambush-like measures, such as raising of import duties on electronics, solar components, etc, forcing Chinese companies in these industries to shift a part of their manufacturing process to India.
In addition to this, a few grandiose projects such as industrial parks and townships have also been floated with little success. While some of these measures have borne fruit the real story of Chinese investments in India is unfolding in completely unrelated sectors where there is barely any role for the government.
Chinese ODI'S Global Slump in 2017
China’s foreign exchange reserves reached a historical peak of $3.99 trillion in June 2014 and then plummeted down to $2.99 trillion by January 2017. This rapid decline was mainly on account of ODI transactions and precipitated a re-think among Chinese policy makers.
Reacting to this, in late November 2016, China’s State Administration of Foreign Exchange (SAFE) hastily halted Chinese ODI transactions. This clampdown on ODI flows was also accompanied by a simultaneous targeted withdrawal of banking support to large Chinese business groups that had spearheaded the ODI binge such as Wanda, Fosun, Anbang and HNA.
As a result, the first half of 2017 witnessed a staggering year-on-year decline of 45.8 percent in global Chinese ODI. This recovered slightly in the second half of 2017 to close the year with an year-on-year drop of 29.4 percent owing to relaxations made in the new regulatory framework.
India's Rise to Prominence
Until 2015, Chinese investors were absent in large investment deals (larger than $100 million) in India. That’s when a couple of such deals were closed by China’s Alibaba ($500 million in Snapdeal and $700 million in Paytm). This was the same time when the number of smartphone users as a percentage of mobile phone users in India crossed 25 percent – a milestone that had triggered growth in China’s own e-commerce market several year ago.
There was finally an opportunity in India which made sense for Chinese companies and also required large sized investments.
This trend continued in 2016, when China’s Tencent invested $150 million in Hike, a messaging app. In the same year a consortium of Chinese investors paid $900 for media.net, making it the single largest investment from China in India ever. Thus within two years the digital industry emerged as the largest recipient of Chinese investments in India.
Politics VS Profits
The surge in Chinese investments in India continued unabated within the digital industry in 2017.
Alibaba and Tencent alone announced or closed deals valued close to two billion dollars. Alibaba’s investments included a second tranche of $177 million in Paytm, $150 million in Zomato, $100 million in FirstCry and $200 million in Big Basket. Tencent’s investments included $400 million in Ola, $700 million in Flipkart and a second round of investment in Practo.
China’s most popular travel website, Ctrip, also made a second investment of $165 million in MakeMyTrip. China’s Xiaomi also announced its intention to join this race with a commitment to invest one billion dollars in Indian startups.
Apart from these deals in the internet industry, 2017 also witnessed a blockbuster deal in the pharmaceutical space when Fosun spent $1.09 billion acquiring a 74 percent stake in India’s Gland Pharma. This deal took more than a year to complete. The original target of 96 percent was whittled down to 86 percent and the deal was finally closed at 74 percent to obviate the need for government approval.
The fact that Chinese ODI flow to India was not impacted by two significant negative political events in 2017 is an indicator of its strong resilience. It is also perhaps evidence that India still remains an under-invested jurisdiction for Chinese ODI relative to other markets.
Channeling Chinese investments into priority sectors, such as infrastructure, or into sectors where substantial job creation can occur still remains a challenge for the Indian government.While Indian startups are grateful for the entry of Chinese venture capitalists, there are large sections of India’s more traditional industries which still remain skeptical about whether to view China as an economic foe or a partner. In the final analysis, it is the wallet of the Indian consumer that speaks the loudest and continues to draw Chinese ODI to India.
Santosh Pai is a partner at Link Legal India Law Services, and has been advising Chinese companies in India since 2010. He also teaches a course on legal aspects of India-China business at IIM, Shillong. He can be reached at @hatpassion. This article initially appeared on view expressed above are The Quint.