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SPECIAL REPORT

SUNDAY TIMES OF INDIA, NEW DELHI AUGUST 22, 2010

China has become the world’s second biggest economy. Should India worry about being swallowed whole?

THE BIG BITE
Saibal Dasgupta | TNN

Beijing: China is growing so fast it creates some sort of world record every week. With 1.4 billion people, China has more mobile phones than any other country. It has more high-speed rail lines and wind power. It has more Internet users. It is also the world’s biggest importer of minerals. It has already dislodged Germany from pole position as the world’s number one exporter. Just a few weeks ago, China became the world's biggest guzzler of energy, though it accepted this particular position with great reluctance. So, when China overtook Japan as the world’s second biggest economy earlier this week and placed itself right behind the US, the news was hardly a surprise — both at home and abroad. China’s official media showed no signs of jubilation. Even in Japan, the leading English daily, The Japan Times, paid little attention and did not rush to write an editorial. It merely published a London-based writer’s commentary on China’s phenomenal rise. But it was a significant milestone. For 43 years, Japan had been second only to the US in economic might. Now, some experts say the Chinese economy will outstrip the US in a decade if both countries continue at their existing rate of GDP growth — 10% for China and 3% for US. Perhaps. Whatever happens, the possibility that China will be the world’s number one economy is already creating a buzz — and jitters — everywhere. But, first to the immediate question. What

RISING DRAGON
Chinese economy at a glance
Rank GDP GDP growth GDP per capita Population below poverty line

2nd $4.99 trillion 9.1% $3,677 2.8%
All figures 2009

Fixed exchange rates US$1 = 6.7918 Renminbi

does Beijing’s move to second slot mean for the world? There are signs it is already having some impact. On August 16, Japan acknowledged it had slipped below China even as it released growth figures for the last quarter. That was just one day after Japanese Prime Minister Naoto Kan publicly apologized for World War II crimes by Japanese soldiers against the Chinese and others. And Kan made history by ensuring that his entire cabinet stayed away from the controversial Yasukuni shrine on the 65th anniversary of Japan’s surrender in World War II. Did Naoto Kan have China’s rise and rise in mind when he issued the apology at considerable cost to his popularity at home? Perhaps. It is clear that Tokyo can no longer ignore the stark truth — that its weak economy has trimmed its influence on regional issues such as the denuclearization of North Korea and territorial disputes relating to the seas around China, Vietnam and Indonesia. For the Communist Party of China (CPC), there is a clear link between the country’s rise and the Japanese prime minister’s public apology. The People’s Daily, which is the CPC’s mouthpiece, editorialized after Kan’s apology that his cabinet's “decision not to pay respect to the Yasukuni Shrine indicates the DJP’s (ruling Democratic Party of Japan’s) upright stance of facing up to history, and this is advantageous for Japan to forge cooperative ties with Asian neighbours in the years ahead”. Any exuberance about its slotting into second place after the US was limited to those remarks in the People’s Daily. Instead, a commerce ministry spokesman cautioned against any sense of glee, pointing out that China still had 40 million people below the poverty line. “China remains a developing country The qual. ity of China's economic development still needs to be raised. It needs more effort to improve economic quality and people's lives,” Yao Jin said. It is a valid point and the Chinese authorities’ public reiteration of their domestic chal-

lenges appear to indicate their focus. Overtaking Japan in terms of gross domestic product is not going to change the basic truth: q China is 10 times the size of Japan q it is a rapidly ageing country and its one-child policy shows signs of becoming a liability q the ongoing property boom has the government caught between a rock and a hard place, ie should it keep the elite happy or extend its largesse to a wide swathe of poor and lower middle class people In addition, President Hu Jintao’s drive to develop the relatively backward western and central provinces instead of focusing on the more advanced eastern and southern provinces poses a serious political problem in itself. The Communist Party has managed to curb any stirring of rebellion in the developed provinces but remains unable to find suitable leaders in the troubled western regions of Xinjiang and Tibet. There are other problems too. With growing prosperity, more Chinese are learning English and with it a new philosophy — that it is man’s right to be free and to have a democratic system of governance. The Communist Party is not ready to deal with this challenge. The Internet’s growing reach and expanded travel facilities have given the young a taste for free speech and a rising desire for self-expression. This could pose a challenge to the one-party system. Unsurprising then that China’s greater success has been in influencing people and policies abroad. There is no doubt that China’s persuasive capability in both the political and diplomatic fields has grown in direct proportion to its export surplus. Countries like Sudan, Pakistan and Myanmar, where the regimes are linked to repression and largescale human rights violations, are major beneficiaries of Chinese aid. In international forums, Beijing backs these regimes politically. This was evident at a recent meeting of Asian political parties in Kunming. The Japanese representative candidly said there was “aid fatigue” in his country which can no longer fund , developmental programmes in poorer countries. But China’s Communist leaders reassured everyone that Beijing was happy to take over as chief paymaster of the aid and development budget. But what price the influence. The west is yet to regard the world’s second biggest economy as a responsible power. Some might say that western approbation is no longer required. But China cannot expect endlessly to grow at 10% or more. What happens then will be key in determining who has the biggest bite of them all.

‘Chance to be bigger than Coke in China’
Sujit John & Mini Joseph Tejaswi | TNN

T

his week, as China moved to number two position on the list of the world’s top economies, one of India’s biggest business delegations was concluding a visit to Shanghai. The purpose was partly to persuade the Chinese government to lift non-tariff barriers to trade and create an environment more conducive to the expansion of Indian enterprise in China. It could hardly be better timing. After more than three decades of focus on building a powerful export-based economy, the Chinese government is beginning to look inwards. This is in order to meet its people’s needs. This focus on the domestic economy is expected to compensate for the slowing of export markets. Jagdish N Sheth, the Charles H Kellstadt professor of marketing in the Goizueta Business School at Emory University in Atlanta, US, is an expert on India and China. He says China has more than one-million millionaires today “All this wealth is now going . to create huge domestic demand,” he told TOI. China appears increasingly open to overseas investors willing to feed this demand. Chinese vice-commerce minister Chen Jian told the Indian delegation: “I hope you can tell Indian entrepreneurs that the Chinese government wants more and more products imported from India. I hope large enterprises from India will have a larger influence than Coca-Cola in China.” Some Indian enterprises have recognized the potential of the Chinese market and moved in aggressively Mahindra & Mahindra has made ac. quisitions in China and has become one of the country’s largest tractor companies. Automotive components company Sundram Fasteners’ Chinese unit supplies both export and domestic markets. Chennai-based Orchid Chemicals and Pharmaceuticals has a 50:50 joint venture with North China Pharmaceutical Corporation and is focussing on bulk manufacturing and marketing of drugs for the Chinese market. “In four years, we have clocked $50 million in revenues and more importantly the operations were profitable , from day one,” says K Raghavendra Rao, CEO of Orchid Chemicals. Rao says China can be great for Indian business. “The (borrowing) cost of funds is low. We have accessed funds at 6% per annum, which is impossible in India. Labour cost is less than half of that in India. We pay a third for power and fuel in China, when compared with that in India. And physical infrastructure is an intangible benefit for all investors.”

But some Indian entrepreneurs are yet to venture into China. Sheth thinks they’re making a mistake. “It is time that India shed its negative image of China. Indian industry should aggressively invest in Chinese markets for its own benefit. While India considers China as a major competition, China looks at India as a partner. China will be extremely receptive to Indian investments and business participation,” he says. Sheth believes that China will soon play the role the US did. China’s rise, he says, will create an economic boom in Africa, the Caribbean, Latin America, Central Asia and Russia. “So it is impossible for India to bypass China and become a global player as eventually the growth of many other emerging geographies are going to be closely linked to China,” he said. There are many opportunities — across sectors — for India. China’s automotive and aviation sectors are on the upswing. Its service, hospitality fast food industries , and infrastructure sectors are booming. Some see particular scope for India’s service industry China is beginning to recognize the lim. its of its zealous focus on manufacturing. It has polluted rivers, denuded forests and caused severe air pollution. By 2020, China is expected to have 400 million tonnes of rubbish, which is equal to the entire waste generated on the planet in 1997. “So they are encouraging services,” points out Som Mittal, president of IT industry body Nasscom. Every province is setting up an IT park. The government has just announced that it will not

CROUCHING TIGER
Indian economy at a glance
Rank Fixed exchange rates GDP GDP growth GDP per capita Population below poverty line

11th
US$1 = Rs 46.6

$1.25 trillion 7.4% $1,031 40%
All figures 2009

Illustration: Neelabh

levy the 5% operating tax on offshore service outsourcing business in 21 key cities till 2013. Mittal says China wants Indian IT companies to set up operations there and believes a Chinese base can be used effectively to target Japanese and Korean markets. “We have a service culture, we are customer-centric and our service maturity level is much higher than that of the Chinese,” he says. The Confederation of Indian Industry (CII) believes there is great scope for services sector cooperation in areas such as R&D, biotechnology, health, education and skill development, tourism and the financial sector. But there are challenges to overcome. Language is perhaps the biggest. What’s more, in some sectors, China is not as open as India would like. Indian IT has won some deals in state-owned enterprises, but the sector is still not seen to be properly open to foreign participation. China has been proactive in developing supply chains to feed into its excellent manufacturing capabilities from the neighbouring countries. “But for India to plug into these supply chains, it will be necessary for both countries to lower nontariff barriers. We need a comprehensive study on such barriers and work to eliminate them,” says Chandrajit Banerjee, director general of CII. China’s boom has also made parts of its economy overly expensive. This has led some global players to look to India as an alternative location for manufacturing. Nokia, which has been exporting from its plant near Chennai, now says it intends to make India an export hub. Dell is said to have begun exports from India. As China rises and focuses on services, expect more manufacturing to shift to India. That will be good for mass employment, which services like IT has not yet been able to deliver. But can India handle manufacturing growth without bringing upon itself the environmental problems China suffered because it became the workshop of the world? For India, China’s rise offers no easy solutions. (Additional reporting by Rajesh Chandramouli in Chennai)

RISE, FALL, RISE... RISE, FALL, RISE... RISE, FALL, RISE... RISE, FALL, RISE... RISE, FALL, RISE...

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rom the 15th to 18th century, China and India controlled almost half of global trade. This pattern continued till India became a part of the British Empire, in the 19th century and Chinese trade became increasingly controlled by those who controlled the sea routes — England, France and the US. India became independent and China turned to communism in the mid-20th century and both began to rebuild their economies. In the 21st century, China and India became the world’s fastest growing economies and the centre of gravity of global trade appeared to be shifting east. A look at the growth trajectory of the Asian giants over 500 years:

16th Century
INDIA
As Arab traders ship Indian goods to Europe through the Red Sea and Mediterranean ports, India’s economy has a 24.5% share of world income. It is the world’s second largest after China. India enjoys a favourable balance of trade — it earns gold and silver from the textiles, sugar, spices, indigo, carpets, etc it sells.

18th Century
INDIA
Aurangzeb’s India has a 24.4% share of world income, the largest in the world. But as Mughal power declines, the East India Company disrupts trade relations between India’s mercantile community and the wider world.

20th Century
INDIA
In 1913, India’s economy has a mere 7.6% share of world income. In 1952, seven years after Independence, it has just 3.8%. By 1973, its economy has grown to $494.8 billion, which is a piffling 3.1% share of world income. In 1991, economic liberalization is initiated by P V Narasimha Rao. By 1998, Indian economy accounts for a 5% share of world income. By 2005, India’s economy is $3,815.6 billion (purchasing power parity) or a 6.3% share of world income.

CHINA
In 1760, as China’s share of global trade begins to fall, the government sets out regulations for foreigners and foreign ships. Canton is the only port open to alien traders. After their War of Independence (1776), the Americans begin to trade with China. It is a setback for the British.

CHINA
Direct maritime trade between Europe and China begins with the Portuguese, who lease an outpost at Macau in 1557. Other Europeans follow. India and China trade with each other using overland routes.

India dominated global trade in the 16th century

17th Century
INDIA
At the turn of the century, Mughal India’s annual income (£17.5 million) is greater than the British budget. As the Mughal Empire reaches its zenith under Shah Jahan, Indian exports exceed its imports — it is selling many more things and lots more of each. Chinese ships dock at Quilon and Calicut, while in Khambat the volume of trade is so high, more than 3,000 ships visit the port every year.

19th Century
INDIA
In 1820, India’s economy —now completely controlled by the East Indian Company — is 16% of world income. The Company promotes the opium trade with China. The Indian agricultural pattern is changed by the Company. By 1870, India has a 12.2% share of world income.
The ‘Open Door’ policy has made China a world power

CHINA
Before Communist China came into being in 1949, the country mainly produces yarn, coal, crude oil, cotton and foodgrain. Mao Zedong puts the country on a Socialist path. In 1980, under Deng Xiaoping, China changes track and the first Special Economic Zones are established in Shenzhen. In 1986, Deng’s “Open-door” policy encourages foreign direct investment. In 1992, Deng accelerates market reforms to establish a “socialist market economy”. For the first time, China figures in the world’s top 10 economies. In 2001, it joins the WTO.
Compiled by Shobhan Saxena

CHINA
China continues to control a quarter of world trade. The English establish a trading post at Canton in 1637. Trade grows further after the Qing emperor relaxes maritime trade restrictions in the 1680’s. By now, Taiwan has come under Qing control. But, the sea trade makes the Chinese apprehensive about conquest.
The Opium Wars led to China’s fall

CHINA
The Qing king refuses to open all ports to foreign traders and seeks to restrict the opium trade with India. War breaks out twice between Britain and China. A defeated China accepts the opium trade and gives Western merchants access to its most developed area. Tea exports increase 500% in eight years from 1843, totalling 42,000,000 kg in 1855.

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