Anticipating Chinese retaliation for India’s FDI restrictions

Chinese economy
Troubles of the Chinese economy expose the fragility of the Asian giant's growth story, ringing alarm bells across its major trading partners.

By Anjali Tandon

China’s rise as an economic superpower in the last few decades has been truly remarkable. The country has evolved remarkably on several fronts including technology, infrastructure, and international engagements. The most notable transformation happened in its foreign direct investment outlook. FDI has been a strategic policy tool for China which used its investments for furthering its economic interests. From being a major FDI destination, the country became a large source of outward investments in the recent decades. China’s emergence as an FDI funding country was unprecedented in terms of speed. For FDI receiving countries, dependence on investment receipts can result in transfer of control which can threaten their development goals as well as economic sovereignty. This calls for actions based on economic and political vigilance.

China’s quest for influence over Asia has received a mixed response from countries in its traditional sphere of influence – allies such as Pakistan, relatively new cohorts such as Sri Lanka and Nepal, and traditional trade partners such as Taiwan and India. The economics of the Covid-19 pandemic warrants a whistle blower’s approach to any move from the international community for distress takeovers of domestic firms, particularly the leveraged ones. Political sensitivity of relations further justifies watchfulness.

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An example of India’s prudence is the recent policy tweak shifting the FDI from neighbouring countries from automatic route to government approval channel. The move is not prohibitive, but the investments have been subjected to screening. The idea has been to stay guarded against hostile takeovers by predatory firms. In fact, India’s move is not standalone one. It is aligned with similar moves initiated by countries such as Australia, Canada, Germany, Italy and Spain. The intensity of the measures varies from dropping the screening threshold for FDI to zero regardless of the value or nature of assets, to increasing the time frame for approvals for up to 6 months. Interestingly, European countries such as Italy have strengthened screening mechanisms on FDI from within EU. Much earlier than India’s move, the European Commission advised its member nations to be vigilant.

There are two key reasons for stepping up screening. First, the unclear pattern of ownership of Chinese investment. Many private investors are supported by public sector. The Chinese government has a vice-like grip over technology developments in AI and telecommunications. Therefore, there is a fear of greater control of the Chinese government in sensitive sectors. The second reason is China’s access to user data through app-based operations. These are spread across consumer industries such as travel (Ola), hospitality (Oyo), food delivery (Swiggy, Zomato) education (Byju) and payment gateways (Paytm), to name a few household names with Chinese investment backing. This makes Indian users vulnerable to sharing of personnel data into the Chinese ecosystem, opening up a wide range of cyber security issues.

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An immediate implication arises for India’s downstream sectors such as automobiles (Geely, BYD), electronic equipment (Xiamoi, Huawei) and pharmaceutical (due to dependency for active pharmaceutical ingredients). The use of Chinese electronic equipment has already been quashed in the Indian telecommunication industry, while the supplies may also be blocked in private telcos. With sagging global demand due to the pandemic-induced recession and an already shrinking US market after the trade-war, it needs to be seen if China is willing to further risk its business prospects through retaliatory actions. However, China is armed with its recently enacted Foreign Investment Law (FIL) enforced on January 1, 2020.

Article 35 of the FIL permits a security review of the investment while also ruling out repeal of the decision. A sense of uncertainty emerges from the Article 42 that recognises the foreign investment enterprise established in accordance with earlier laws to retain organisation forms for up to the 5-year transformation period after the FIL. However, it is unclear if a fresh approval is required thereafter. This brings to fore a possibility of economic retaliation by China. Indian investors abroad should be wary of possible retaliatory measures as the dragon seems to be on the offensive now. China, with its ambition for uncontested supremacy in Asia, cannot be expected to take things lying down.

(Dr Anjali Tandon is Associate Professor at the Institute for Studies in Industrial Development, New Delhi. Views are personal.)