MMA talk on China 1 Strategy - Part 2

0:00a straight deficit. And the red lines on top are the China straight surplus. Okay, so, and for India, it's the yellow or the orange line, whatever you want to call that color. So, basically what's been happening? China, the US straight deficit keeps increasing and China straight surplus keeps going up. Okay, and so this is basically, and India has largely been, you know, with a little bit of fluctuation here and there. So India is not a major contributor to global imbalances. But while it is not a contributor to global imbalances, whatever is done by the other two major contributors, which is basically China and the US, affects India. So India needs to be ready to deal with those global, with the with the impact of those global imbalances. So, with this being the trade, with this being the sort of the, you know, trade situation globally over the last three years, what's happened post the tariffs? Here you can just focus on the last two bars, which is the quarter

1:01one, first and second quarter of this year. And the most telling one is the last bar on the right side, which is basically post the tariffs. So, in the quarter from March to June of this year, US trade deficit shrank considerably. It went from what $425 billion in the first quarter to about $265 in the second. So, it's quite a considerable reduction in the US trade deficit, which is what all the tariffs were meant to accomplish anyway. So, and then India is the light blue line just below the x-axis. So, that, you know, that sort of has remained, you know, approximately the trend what it has been over the past several quarter several years. But the interesting story is in neither of these. The most interesting story is in the dark blue line above the x-axis, which is China's trade surplus. And interestingly, that hasn't changed much at all. So, despite the fact that the US has significantly reduced its

2:03imports from China and from the rest of the world, Chinese exports haven't changed. Okay. So, the question is, where have all these gone? And that we, I'll talk about in just a minute. So, basically this influences the dynamic of how China deals with the rest of the world. Okay. So, while just to make the point again, US has significantly reduced its trade deficit, China's trade surplus hasn't changed significantly. It went down very marginally. So, in that context, again, to understand the focus for the India-China relationship, what exactly is happening, this chart essentially shows you that China is no longer dependent on the western world, as much as it was. The green line starting from the top left hand corner going down is the share of China's exports going to the G7 plus EU. So, let's call that the developed world. So, in 2000. So, it started at about 70 percent of China's exports would go to the developed world

3:10in 2000. In 2025, it's 40 percent. So, it has consistently reduced its dependence on the western world. If you look at the light blue line, that is the, sorry, the dark blue line, which is the second line on the left, that is the its exports to the US. 25 years ago, 30 percent of China's exports used to go to the US. Today, it's half, 16 percent. Okay. So, the China depends a lot less on the US than it did 25 years ago. Where are all these exports going now? They are going to developing countries. Okay. So, the point is, the developing world is far more important to China today than the developed world is. And since we sit in the developing world, correspondingly, we need to get this dynamic in order to understand what's going on. The light blue line that you see, which is the third line on the left, that India is not a part of that just to start, but it is China's

4:11exports to pretty much the developing world, broadly put. It's, it's exposed to what are called the Belt and Road Initiative countries. It's about 120 developing countries around the world to which China exports. So, that has gone, that has doubled in the last 25 years. So, the point just to be made is China is no longer dependent on the West and therefore has a lot more leverage with the West and therefore is able to take a lot more pressure from the West because it doesn't depend on them, on them as much as it used to. Now, who are China's key export partners? Very briefly here, based again, you know, you can see ASEAN, the light green one at the bottom. I thought the colors looked much nicer on my, okay, they look okay there. So, the light green at the bottom, that's ASEAN and that is the place where most of the exports have gone to. So, China's immediate neighbor is basically in Southeast Asia and the India is the, okay, I need to get,

5:15this is the brown bar right below the light blue bar. So, it's the third from the bottom. So, that's India there and the message from this and the left part of the chart is in absolute dollars in dollar terms and the right side is as a share of China's total exports, okay. So, you can see that, you know, both in absolute dollar terms as well as in as a share of China's exports, the brown line, which is India, is small. So, while in, for India, China is its single largest trade partner, for China, India is very small, okay. So, this clearly defines a very unacimetric relationship between the two countries when it comes to trade dynamics, when it comes to investment dynamics at a macro level and one needs to, that is, that is the reality. This is the slide that this is covers from 2009 to today. So, we are covering about a 15-year period

6:16and over this period India has had multiple, you know, growth regimes. So, overall this period, you know, as, as China has grown to India's largest trade partner, India has remained a relatively small share of China's exports. We have seen, we've done looked at debt, we have looked at a bit of trade, let's look at investments. What is China doing with this foreign investments? China now is one of the largest foreign investors in the world. You know, this, it's not the largest, it's still the US, but you know, this is one of the largest. This shows you what's happened over the last 10 or 12 years and the story is almost entirely in the top three bars, the light green, the yellow and the dark green. Basically, the same story as in trade, China invests a lot more in developing countries now than it invests in the developed world. It invested a lot in the developing, in the developed world 10 or 12 years ago, it doesn't do that anymore.

7:22Most of its investments go to ASEAN, it goes, it goes to the emerging countries of Europe, it goes to the Middle East and North Africa. And this is, there is also, you know, so basically, once again, China is not as dependent for its investments as it used to be on the West, and about half or more of its investments are in manufacturing, the big sectors are on the right. It's basically energy, you know, strategic industries, electronics, semiconductors, which you, which people here would appreciate, mining and materials, etc. So these are the areas in which China invests. And this chart is basically, the most interesting part of this chart is what it does not show, not what it shows. The left side is India's overseas investment and the right side is China's overseas investment. In the red on the left is China, you will have to

8:25search really hard to find the red on the left side chart. And similarly, on the right, the yellow is India and you will have to search really hard to find where India is on the right side, which basically means that neither country invests in the other in any significant way. India does not invest in China, China does not invest in India. And so this is, as I said, what this chart does not show is actually the more interesting part. So we have, if we are going to, you know, think about getting more engaged in China plus one, this is the base that we are starting from. Okay, we are starting from a from a pretty low base. All right. So now I'll get quick, now I'll get to what, what have we found in our discussion so far. As I mentioned, this is research in progress. We'd love to have more conversations with you here outside. But these are some of the some of the, you know, conversations that we had and our and our findings. There are two broad

9:32areas in which both business sector and policy makers fall into. One set of, one area is areas where they agree. So these are the areas where there is kind of consensus. I call them the consensus areas. First, there is no question that, you know, given it's the largest country in the world in terms of population is the fastest growing large economy in the world. We have the youngest, one of the youngest demographics in the world. The India's demographic and market potential, there is no way that anybody who want any large player who wants to be present, who wants to, you know, participate cannot be present in India for the long term. That is a universal agreement across across everybody that we have spoken to. So with that and there is also sort of a positive sort of a very positive sentiment in terms of an excitement about India's potential.

10:35And there is also an agreement that India actually is benefiting from China plus one strategies. Yeah. So these are Indian use of India's importance. Okay. And these are across businesses and across policy makers. And I'll come to the differences in just a minute. There are considerable differences as you might expect. Have I answered the question? Okay. All right. So there's, you know, there's basically also a lot of positive excitement about the potential of India. That said, there is also an agreement that there are serious structural disadvantages with respect to China. And the Frank touched upon some of those. There is almost a universal agreement that there is India cannot compete with China today on a man on manufacturing scale on on cost on supply chain integration

11:35and speed. And these are some of your colleagues in the business community telling us that. Okay. So this is not my conclusions. And China has too many cost advantages. China has an ecosystem that is very mature. So there are significant hurdles that India needs to cross. There is also the unresolved India China border issue despite the handshakes in October. And clearly economics is always come second to politics. So therefore there is a necessity to resolve that or to at least reach a political agreement on that that is acceptable to our political leaders. And any substantial growth in economic relationship will be subject to, you know, the resolution or agreement and geopolitics. And the last issue again on which there is agreement is that, you know, ease of doing business in India is not uniform. And, you know, it varies considerably. We are in one of the states that is, you know, heralded as one of India's best states to do business in,

12:40consistently for a long time. That's not the same case with other states. And so that creates a challenge for businesses. So these are some of the areas where across the board people agree. Now, of course, there are people, there are areas where people don't agree. And here is some of the contentious areas that we have found out. One, businesses want to separate business from politics. So they would like to continue to do business with China either as a straight partners or as getting investment. And they want to try to figure out how to separate that. And there is an example in the world which has successfully managed this. And that is Japan. Japan has very serious political differences with China. But somehow they have figured out a way in which their businessmen and their business community does an enormous amount of business with China while having very serious political differences. So maybe something to be discussed in

13:40seeing whether something of that applies. Yes, they don't have a land border. That is true, but they are closed enough in other areas. So they have some serious issues. Something to think about. Businesses also want to act, they want to actively engage with Chinese firms. And what is considered, you know, what I say, do a China on China. What did China do 20, 30 years ago when it was attracting global capital into China? They basically insisted that along with capital, if somebody wanted to open a business in China, they had to bring technology, they had to transfer the technology, they had to upskill Chinese workers, they had to form joint ventures. So they had a series of conditions in order to allow the global capital to come in. Now it may not be the same world as it was 20 or 30 years ago, but something that India needs to think about in terms of would there be certain, you know, what kind of an environment does India need to create in order to get businesses from there to here. So do a China on China basically. And then the other view is from

14:45the business perspective is India's restrictive policies are a hurdle, the same they're doing business issues. Now comes the strategic issue. So some of the policy makers in some fact some of the businesses too. Here, which is the opposing view, which is look China is most to call it most politely a non-benign partner actor, as far as India is concerned. So deep economic integration with a non-benign actor is simply not possible and it poses a national security threat. So these are the views of the people that we spoke to. I want to qualify it once again. And therefore India needs to take a cautious approach. They need to prioritize strategic autonomy. We need to prioritize self-reliance, atmosphere, Bharat, even if it means lower growth. So we have had conversations in which people have been explicit that, you know, if necessary we take on slower growth but that's a

15:46price worth pay. And the priority should be to try to diversify supply chains away from China rather than deepening the dependency. So you can see two completely diametric views amongst the people that we have spoken to. And one area where there is another area where there is contention and they've been many areas but given the shortage of time I'm just going to focus on this one. There are both critics and proponents of China's policy stance since 2020. And so what are the critics say? They basically say that policies like depression or tree and the quality control orders which many of you in business are definitely more than aware of, that there are disproportionate overreaction. They damaged Indian businesses. They cut off access to capital, risk capital. And ultimately they didn't work anyway because the trade deficit looked what happened to it. Even with all of these things. So that is the criticism. And then the idea is also the quality control orders etc. what they actually accomplished

16:51was increased the input cost of manufacturers and make India more, Indian exports, uncompetitive. And they basically created the tension between protecting domestic industry and you know allowing India to become a global hub. So these are what the amongst the group of people we spoke to the critics say. And what are the proponents of this policy say? They say look these actions were necessary. It was important for signal to China that you know what it did was unacceptable. They protect national security in the face of Chinese aggression and they represent a fair balance between economic and security interests. So that's what the proponents say. And then the protectionism was also necessary to shield you know nascent Indian industry from Chinese competition so that we allow them to scale up. So these are two different kinds of views that we get. So I've told you what is it that you know we have heard so maybe it's time to sort of our view based on what we have discussed so far. In our view greater economic engagement with

17:54China will be necessary for India's own self-interest. But it needs to be on India's terms. It cannot, it India needs to define what the terms of its engagement is going to be. And what we have set ourselves a target of Viksit Bharat by 2047, it is going to be difficult to get that eight, eight and a half percent of GDP growth but that we need between now and 2047 without further engagement with China. It has the necessary technology, it has the capital, it has the skills and all of these available at an economic cost, economic price. So they are available economically. So we have to figure out a way in which we can engage. So that's since China plus one and figuring out how best to do it is going to be important. Border and security issues are clearly very important and you know our political leaders that they need to find acceptable solutions. Both trade and investment posed dilemmas for India

19:01between 2020 and 24 as I mentioned our trade deficit with China double. And this was in a period when the relationship was not very good. Let's suppose the relationship actually improves and let's suppose India's growth rate improves even more. What do you expect the trade deficit to do? And if a hundred billion itself is a problem, what will be much larger trade deficit? So that is one issue. But then you know attracting greater investment from China also means how to deal with the domestic manufacturers and they have challenges in terms of taking on the Chinese competition. So these are some issues. And the last is from our perspective is, as Frank mentioned earlier, the West allowed China to grow, to develop, to become what it is today. It is, and China has learned that it knows it very well. It is highly unlikely that China is going to allow the same thing to happen to India. Okay, so it is not going to be as generous in its contributions as the West was to China.

20:01So the question is there are going to be always some parts of a supply chain that India is not going to get, at least not from China. So then you know, so therefore the dependency will continue. So the question is, how do you, what balance do you find in all of this to make sure that yes, we do get something that we are happy with on our terms but at the same time we appreciate that that is what, you know, the reality is. I'll just leave you with these questions. I have a bunch of them that I put up on the screen and maybe with the help of our, with Professor John, the moderator we can take on some of these questions. Thank you. Thank you, Dr. Srinivas and Dr. Frank. I must say that it was a very penetrating analysis and rich insights drawn from looking at both China's growth experience as well as

21:02our China is overgrown the reliance on Western economy and looking at more developing countries to their trade balance problems. I'm sure there would be series of questions coming up. While the question staff, let me raise two questions. One, to Frank, is the dual circulation model working because what you are acknowledging is that there is a depressed demand and that China is not growing. And of course, even though there is a reversal in globalization, China has overcome that reversal of globalization by banking on the developing world. So what's your sense that the dual circulation model is working? What are the challenges there and how China is overcoming that? That's the question. All right. Dual circulation means two different things as you're

22:06already alluded to. The first one is to create or relocate supply chains as much as possible to China or develop them within China. So the keyword is self-reliance. The keyword is not consumption economical. So in that sense, China has made huge strides in the last seven, eight years since 2020, particularly when the word dual circulation was first mooted in doing just that. And that in part through financialized measures, but also to my surprise, using old-fashioned planned economy style guidance and even planning. So governance or governors of provinces princes were made responsible for creating supply chains for specific key industries in their province across China. So that is what I'm very familiar with from China in the 1970s and even

23:13the 1980s. So that's one thing. So they're successful there, but they're successful only on their own terms, not in terms that we would normally understand like economic growth and things like that distribution and what have you. Distribution is as left to other policies, right? Dual circulation is also that you rely on the world. They used to say for the things that China really needs, but what it has boiled down to is an investment in strategic sectors, the strategic technologies. That's what the real focus at the moment. So to try to tap the world as much as possible with the things that China still needs from it, that contribute to its own strategic priorities and not inviting foreign investment across the world. But secondly, and much more importantly, and that is what Sweden has been saying in his presentation, export. So this you can call it dumping, you can call it export glut, whatever you want to call it. But that to them

24:15is also due to circulation, but it's circulation away from China, right? So I think on the whole, they have very, very been very, very successful and the question is really, are they being allowed to continue that? That is the real political question. And that is something that I have views on, but my views don't really matter because ultimately I'm not the guy who makes any decisions on this. I have a question for Dr. Srinivas. You told us that Press Note 3 has been detrimental for India. Is this audible Press Note 3 and its impact, right? Trade deficits are increasing, India exports around about 14 billion to China and imports around about 115 billion, right? Now what are the lessons which India could learn because you had conversation with the policymakers

25:16and you have also had some conversation with those who import from China? Now what lessons are emerging from your conversations which would help India to reverse the trade deficit because it's something which is pretty dark? But I mean, I think, first of all, what I mean, I mentioned about Press Note 3, I mean it very clear, it was the views of the people that we spoke to. I just want to clarify that for the record. And I can, I'm happy, in terms of trying to reduce the trade deficit from an economist's perspective, you know, in my view, politicians are hung up on bilateral trade deficits. It's important to keep in mind that yes, bilateral trade deficits, you need to keep your eye on it. I'm not saying that's not the case. But as long as you are a growing economy and effectively

26:17using what is it that you're importing, a bilateral trade deficit is not from an economic perspective, a major problem. Okay, it just becomes, it's more a political problem than an economic problem. And so if India needs the intermediate goods, the APIs, the machinery, etc., to grow at six and a half, seven, eight percent, whatever its targets are and the most efficient way to get it from is China, so be it. And you know, and so as an economist, I'm much less concerned that what a bilateral trade deficit as long as the overall trade situation is, is, is, is, in, when it looks good for India. But on the other hand, I understand that this is a political problem. So I think I'm going to leave it at that. Thank you. So there is another question coming up for you, Dr. Srinivas. What's the role of innovation and technology in China's growth and

27:19what India could learn if India has to catch up? Because there is a huge difference between the China and India's story. So, so what's China has done positively about innovation and technology and what lessons are emerging for India from that? Yeah, I think there was also another question that S1 R&D, so maybe both of these can be combined. I saw that on the screen. China inwardly invests a lot in R&D. It's in, if I'm correct, it's investing now as a share of GDP either comparable to or even more than the US. It is actually the highest number of published papers, research papers and one step beyond that, it's the highest number of citations of those research papers. So actually things are, you know, and then in terms of patents, all of these China is leading now. So it has had a systematic approach to its innovation environment,

28:20it has invested, it has attracted people that it felt, you know, would help with research efforts from overseas, from within the country, it has set up institutions where these people can work and then it has also tried to, you know, be, you know, in some cases China has been at the cutting edge of technology. On the other hand, it has been at the cutting edge of operationalizing existing technology. Sometimes, you know, being first is not necessarily the greatest thing, you being second, but doing much better than the first in operationalizing it is actually not such a bad thing. So I think, you know, there's an entire China takes pretty much an ecosystem approach to just about everything. In fact, in one of our meetings, we learned that there was a person who is now looking at trying to publish journals in China. Now, you know, that is sort of

29:21so far ahead in terms of thinking about research and innovation because ultimately you have to publish this stuff somewhere, you know, but China thinks about everything from, you know, from the start of the research to the publication of the journals. I think that's the kind of approach that is required. We don't have to put everything into place at the same time, but, you know, we definitely need in terms of lessons significantly more investment, probably significantly less bureaucracy, and, you know, and sort of a more trust in some form in amongst the researchers in terms of what is it that they are, you know, expected to accomplish. I mean, they have to be held to standards. That's not the question, but, you know, it's in innovation and research is very different from sort of a nine to five job. So therefore, they are one needs to understand the difference and invest in it for the long term. Frank, there is a question. How much has it been getting from China plus what? Yeah, so that question. Basically, it's, no, no, no, no, it, well, of course, it's really,

30:23it's always too early, but it's contained on from what Professor Siniface has been saying. I think on the whole, India's benefit from China plus one has been very modest. It's very hard to exactly put your finger on how much or how little that was because one of the things that happens is for instance that firms that are already foreign firms that are already in China simply start investing more. Now, you don't really know whether they do that because of India or because they do that because they don't want to be so beholden to China anymore. So that's impossible. These are, you can only be qualitatively by talking to the managers and the CEO is like, what kind of strategic decision do you make? And I don't think that India can compete really, given what it is, with Southeast Asia, with Mexico as pure China plus one hubs where people

31:26set up factories or assembly plans or just so on some buttons or whatever for them further export to the United States or to Europe or to Japan or back to China for that matter. I don't think that should be India's gain. India is not good enough for that. India is fundamentally and I don't like to say this, but it's true. It's still an inward-looking economy. So what is India's strength? It's its market. It is its population, the fact that if you set up shop here, you have a huge market to cater for. So what you should say is China plus one yes, but you try to should serve the local market here and don't look at India as an alternative to say Malaysia. That's not going to be a winner. So that as far as we go at the moment, falling on from Shini, I think that, wait, let me, let me think.

32:27Sorry, I forget the point that I wasn't going to make, but I'll make it in a minute when I remember. Sorry about that. Right, Dr. Shini was in terms of capability gaps. I'm trying to go beyond that question there. Challenge for India is capability gap, both in terms of policy perception as well as in terms of strategy evolution and the power movement. So what's your sense? Both of you have looked at China much more in depth and now you're spent about two to three weeks in India. What are your emergency perception about the credibility gaps and gap in terms of capability between India and China? And is there a way forward in terms of bridging those gaps? I think in my view, yes, there is definitely a way forward. You want me to answer this question first

33:32or you want me to answer this question? Okay, so let me try to do that. So the question here is, what are the, from a financial perspective, can we go back to the previous one so that I can see the question if you don't mind? Okay. Yeah, so I think the person asked what he asked, what the financial risks are. Three views and three things in my view. One, I mean, looking at it purely as a financial sector as a financial person. But a lot of dependence on China has PNL risk, which is basically if by chance they decide one day that they're not going to supply you what it is that they plan to supply you, you immediately have a problem. So excessive dependence on China that is one issue. If you have, if you take, you know, if you are dependent on China significantly for investment and you have balance sheet risk, obviously the point is as investors, it is a bit harder for them to take it away. But at the same time, you know, you have, you have, you potentially have constraints on that. And then, you know, I mean, a large dependence on China also,

34:34which is one of the reasons why companies try to move to other places, which is you know, I mean, if China, for whatever reason, some of the risks, for example, you know, they had China has a lot of rules now regarding security issues or, you know, if it has a supply chain problem, for example, as you were in COVID, it had, it has issues with, you know, executives, you know, in China, some of them, which have, who have faced risks. So all of these, it can create fundamental, you know, existential issues for the firm. So all of these are areas in which risks that companies face in terms of overrelying on China and which is exactly why the China plus one strategies have been looked at by companies. And what can, you know, what can India do in terms of offering these exactly, in a sense, an environment where, you know, these issues are

35:36much less of a concern. And where, you know, again, as I mentioned up front, I am a firm, believe whether it should be done on India's terms. And, you know, so once those, what it, but I think the critical issue dealing with China is clarity on what is it that we want. And, you know, the one thing about China is a crystal clear about what they need, what they want 10 years from now, 20 years from now, that's what they want to get. And I think as long as we are clear and we define the terms of the engagement, you know, I think we should have a very good experience in terms of engaging on this particular issue, but that clarity is tough to come, but it's important to have it. That could be the difference between a centralized decision making, we've been a distributed decision making, right? And so you're alluding to that. I guess that this question is being addressed considering trade deficit of 100 billion. What are the main areas India should look at and you address that, right? So we'll go to the next one and that will be the last question.

36:42Can you go to the next question? What share, what share of China's FDI is depth and what is the equity? If it is largely depth and these are to be developing countries, what has been China's response when there is inability to feel? Okay, this is a topic which is going to take more than two minutes. Whoever is the person writing this, I'm happy to leave a number. This is something I've worked a lot on. So I'm happy to give you a very detailed answer. The short answer to this question is a significant amount of Chinese investment overseas and that is what I presume you're asking is debt. And that's not just true of China. I mean across the board for many countries, that's the case, but for China, yes, it is large. Equity is a relatively small share, but the sustainability of the debt and the ability of the countries to repay etc, it's all

37:47case by case, country specific. I can't generalize, you know, and China is learning its own lessons as it has evolved as an investor. The investment started sort of in the say 2010-ish roughly and it has since then become a very large investor in the world if you want to call it either as debt or equity. So I'm only partly answering the question. I'm happy to share with the person and we can have a bilateral conversation, I really, it's two technical to answer from here. Thank you so much. I guess that group captain is saying that you have stretched your time and he's asking me that next time he will not give me the Me the Waterytales Road. Thank you. Thank you. Thank you so much. I guess that group captain is saying that you have stressed your time and he's asking me that next time he will not give me the Me the Waterytales Road. Come over, group captain. Thanks. Thank you.