Chinese business giants lose steam

Recent actions against Chinese companies, in India and elsewhere, are impacting economic ties with China. Are they also having an impact on China's internal dynamics?

Chinese companies operating in various countries including India have come under the scanner recently. Several of them made huge profits due to the backing of the Communist party-state in terms of subsidies, diplomatic support, managerial skills, mass production, cost advantage and other factors. However, this 'win-win' strategy of China is running out of steam.

The United States government targeted China’s companies on espionage cases, unfair trade practices, intellectual property thefts, growing trade deficits, lack of market economy and the consequent discrimination of American companies in the China market. Europe also rolled back Huawei 5G telecom networks. In the backdrop of the Ukraine conflict, NATO’s move to target Russia and China has dwindled China’s business prospects. India also recently began tightening the screws after the June 2020 Galwan incident.

As Foreign Minister S Jaishankar repeatedly reminded the Chinese leadership, unless and until peace prevails on the borders, bilateral relations — including trade and economic relations — cannot improve. As a result, India initially banned over 200 Chinese IT apps, restricted Chinese investment in infrastructure projects and closed several Confucius classrooms.

Bilateral trade

In the last few months, as a part of 'decoupling strategy', India began exerting pressure on China in trade and economic relations. This was in the backdrop of no progress on the 'de-escalation and disengagement' process in the border areas, despite 16 rounds of corps commanders’ meetings. Clearly, the political messaging to China is that after the Galwan incident, it cannot be business as usual, and economic relations come under political control as well.

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Trade with India (about $120 billion last year) is only a minuscule one percent of the overall trade of China (estimated at over $6 trillion a year). Yet, Beijing was able to earn a whopping $1.2 trillion through trade deficits with India in the past decade. With such revenues, China could easily subsidise the China-Pakistan Economic Corridor (worth $62 billion), in addition to infrastructure projects in Tibet, Xinjiang or Sri Lanka and Nepal.

After the Galwan incident, India consciously began to diversify from the China market and reduce dependence on an estimated 4,400 items of Chinese merchandise. However, due to the pandemic, bilateral trade ballooned to over $120 billion last year, despite the protests of the Indian Consul General in Hong Kong on inflated prices of oxygen concentrators.

India also began looking at the operations of Chinese companies. Many Chinese firms – specifically in the telecom sector such as Xiaomi, Vivo, Oppo, Zhongxing (ZTE), Huawei and others, have dominated the retail sector in India. Several of these have been investigated on money laundering charges. For instance, the Enforcement Directorate’s raid on Xiaomi this May yielded nearly $700 million in money laundering and tax evasion charges. A July raid on Vivo yielded over $3 billion in 'remittances' to China. Many Chinese business leaders fled the country.

Backdoor entry

Another critical area is the backdoor entry of China’s capital into the Indian market, even as the total Chinese direct investment is only $8.2 billion for a $17 trillion economy. The portfolio investments of the People's Bank of China in startups, and its investment of over one percent in Housing Development Finance Corporation had raised eyebrows in India on the pervasive financial influence that China is intending to build up. By April, India’s Ministry of Home Affairs curbed the automatic route for investors from countries bordering India.

Indian actions thus concern not only telecom security but also financial security. However, while China’s official position reiterated the 'law of the land' principle, there is also a veiled criticism of India, implying that these raids would affect future business prospects.

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China’s foreign ministry spokesman Zhao Lijian said in a recent statement that India should “provide a fair, just and non-discriminatory business environment for Chinese enterprises to invest and operate within their borders”. However, there was no mention about China’s discriminatory practices towards Indian pharmaceuticals and IT companies in the Chinese market.

Further, on July 5, the spokesperson of China’s embassy in New Delhi, Wang Xiaojian said that such investigations “impede the improvement of business environment in India and chills (sic) the confidence and willingness of market entities from other countries, including Chinese enterprises to invest and operate in India.”

The Communist party’s influence on all walks of life, in China and abroad, is pervasive. Under China’s law, all enterprises which have more than seven employees —private or state-owned companies — should establish Communist party cells that report directly to the central committee. Also, by the 2015 national intelligence law, all individuals or institutions are required to cooperate with the country’s agencies on all matters of concern to the party-state. This has alerted many countries to the pitfalls of doing business with China.

In this global business environment that has grown generally restrictive for Chinese companies, and in the backdrop of relative economic decline — an estimated 4% this year, China’s Communist party is concerned about the blowback effect on domestic politics.

With the 20th Community party Congress scheduled to happen this November, political jockeying has intensified for the 6th generation of political leadership. It is natural that the economic aspects also come into the limelight. Through the anti-corruption drive since 2012, and the 'common prosperity' campaign since last year, Xi Jinping was able to make a major dent in the money power of Jiang Zemin’s faction in the communist party.

State-business connection

Many of Jiang’s cronies in the party-state and businesses have been netted. However, Jiang’s faction is said to have deep pockets in China. Jiang, who served as the Shanghai party secretary before 1989, has been identified as a part of the 'Shanghai gang'. It would be no exaggeration to say that reformist China was mostly guided by this 'Shanghai gang'.

Last year, China’s major fintech company Alibaba’s Ant Group stock listing was cancelled, affecting several shareholders, including Jiang Zemin’s grandson. Also, a Hangzhou city official was put in dock ostensibly for his connections to the Alibaba company. Restrictions on Tencent, Meituan and other companies and the free fall of real-estate tycoons had sent shivers across Xi’s opposing factions.

However, Xi also needed funds to prop up his vision and his factional leaders at various levels. It is well-known that at the village level direct elections, the moneyed class of leaders are emerging in large numbers. Money and muscle power are also playing a big role in the Communist party selection process for national congress at the county, prefecture, province and centre levels. Significantly, in the provincial people’s congress selection process, a significant percentage of members belong to the nouveau riche.

All of these political activities in the run-up to the 20th Communist party congress need money bags, which can only be delivered by party-state 'loyal' Chinese companies. However, these companies have come under increasing scrutiny abroad recently, thus impacting the political dynamics back in China. It is thus a tricky political issue in China.

(Srikanth Kondapalli is Dean of School of International Studies at Jawaharlal Nehru University)