China and India

– To cooperate or to compete?
That’s the question

Tamara Trinh Think tank of Deutsche Bank Group

Senior Economist Asia
OKB - 16th Annual Roundtable

Evolving bilateral relationship

Border-war (1962)
India cites China threat as justification for nuclear missile tests (1998)
President Narayanan visits China 2000 (re-engagement)
Premier Zhu Rongji visits India 2002
Prime Minister Vajpayee visits China 2003
Premier Wen Jiabao visits India 2005
President Hu Jintao visits India 2006

Recent initiatives
Proposal of a “strategic partnership” (Apr 2005)
Memorandum on Cooperation in oil and gas (Jan 2006)
– Collaboration / joint exploration and development of hydrocarbon resources in third countries – stop bidding wars
(already in Sudan, Syria)
Declaration to double bilateral trade to USD 40 bn by 2010 (Nov 2006)
– Diversify trade baskets, remove impediments, utilize complementarities
– Facilitate trade in agricultural goods
– Maximize negotiating leverage at WTO
Report on feasibility & benefits of an India-China Free Trade Agreement by October 2007

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Closer trade ties

Bilateral trade has been increasing China could soon become India's
rapidly largest trading partner
USD bn
14 25%

12 20%

10
15%

8
10%

6
5%
4

0%
2 1990 1992 1994 1996 1998 2000 2002 2004 2006
ytd
China's export to the US, % of total exports
0 China's exports to India, % of total exports
China's imports from India, % of total imports
1994 1996 1998 2000 2002 2004 2006 ytd
India's exports to the US, % of total exports
Chinese imports from India India's exports to China, % of total exports
Chinese exports to India Source: CEIC India's imports from China, % of total imports
Source: IMF Direction of Trade Statistics

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Partners or Competitors?
Partners
Supporting a multi-polar world / Increase
bargaining power in multilateral bodies
Cooperation to secure energy supplies
Complementary economic structure?
Access to potentially large markets
Tamara Trinh · Vienna, 14-15 Dec 2006 · page 4
Competitors
(Economic) Nationalism
Mutual distrust / security concerns
Unequal relationship
Healthy competition to give incentives to
firms and states to improve & upgrade
OKB - 16th Annual Roundtable

Partners
Avoiding bidding wars for energy assets & increasing bargaining power & sharing risks
– ONGC & CNPC: Syria, Sudan
– ONGC & Sinpopec: Colombia, Sao Tome and Principe, Iran?,
– Indian Oil & Sinopec: Kazakhstan?
Combining the world’s workshop and the world’s office
– China’s hardware + India’s software – leadership position worldwide?
– Physical infrastructure + financial infrastructure
Global champions look for new markets, manufacturing sites, talent
– Opportunities for
– Indian firms: pharmaceuticals & biotech, IT software / outsourcing, automotive sector
– Potential Indian exports: agricultural & marine products (e.g. oil seeds, salt, rubber, dairy products), inorganic
chemicals, plastic, optical and medical equipment, & services and knowledge trade in areas like biotechnology,
IT and ITES, health, education, tourism and financial sector
– Chinese firms: infrastructure (roads, ports, telecoms), consumer durables (electronics like air conditioners,
microwave ovens, refrigerators), interested in more border trade
– Tourism
– Partnerships to exchange knowledge and technology and gain market access
– Gas Authority of India Ltd. (GAIL) & China Gas Holding – gas distribution in 40 Chinese cities, possible
participation in LNG sector
– Mahindra & Mahindra & Jiangling Motor Co Group (majority JV) – production of tractors
– Bharat Forge & FAW Corporation (majority JV) – automotive forging
– Indian IT firms (Tata Consultancy services, Infosys) employ hundreds of programmers in China
– Contract manufacturing: Indian consumer durable companies and telecom operators source products from
China
– Huawei has R&D facility in Bangalore

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Competitors

Competitors
India's economy still relatively closed for
Pride about the newfound global position Asian standards
– Important also for internal cohesion Exports + Imports (g&s), % of GDP
160%
Security concerns
– Border issues China
140%
– Geopolitical influence India
South Korea
– Relationship with the US 120%
Thailand
– Chinese firms complain about restrictions on investment
in ports and telecommunication & restrictive visa regime 100%

Trade imbalances 80%

– Unequal trade structure:
– India exports mostly raw materials (ores, steel, 60%
plastics, cotton), imports manufactured goods
(electronic goods, mineral fuels, silk) 40%
– China is India’s most important import partner and
second largest export destination (after the US), but 20%
not vice versa
– Competition in third markets (US, EU) as each wants to 0%
emulate success of other (manufacturing vs software) 1990 1992 1994 1996 1998 2000 2002 2004 2006e
– Genuine anti-dumping concerns or reluctance to face
Source: DB Research
global competition?

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OKB - 16th Annual Roundtable

2006: Year of friendship – where do we go from here?

Unambitious target of roughly doubling trade to USD 40 bn by 2010

Increase bilateral investment flows to USD 5 bn by 2010
– Indian stats: Stock of Chinese FDI into India USD 2.9 - 3.5 m,
– Chinese newspaper: China's FDI to India: US$48.47 million by September 2006 ytd (into sectors like
communications and light industry); India's realized investment in China's non-financial sectors: US$136 million

(Similar) Internal problems take most of the political attention

– Rapid growth is not everything – ideological fights
– How to spread wealth to those who still have not benefited to avoid social unrest
– Unemployment, health care
– Regional disparities (urban – rural, East - West / South – North) and ethnic disparities
– Environmental degradation

Competitive advantages are being eroded

– Higher business costs through
– Rising labor costs, high turnover (scarcity of high-skilled personnel)
– Tougher competition
– High property prices
– Infrastructure bottlenecks
– Ambiguous attitude towards foreign investment

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Points for discussion

What would be better for future economic growth in China and India : Should
India become another workshop of the world and China a second global office
with both competing against each other, or shall they combine their
comparative advantages?

What would be better for G7 economic growth: Cooperation or competition

between China and India?

What in your view is actually going to happen: “Chindia” or “China vs India”?

Cooperate with each other where unable to compete individually?
Cooperate with others to compete against each other?

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