New Delhi: Trade experts have rejected China’s criticism of India’s decision to scrutinise the foreign direct investment coming from the countries that share land borders with India. China will get no relief on investment grounds at any global forum, said Ajay Dua, former secretary in the ministry of commerce and industries, adding that the situation would have turned to India's disadvantage if the country had joined China backed free trade agreement RCEP last year.
“They are wrongly interpreting the investment rules,” Ajay Dua told ETV Bharat.
“Investment rules do not say that a country cannot put a filter for scrutinising the FDI investment. We are just saying ‘inform us’. We have not prohibited the FDI coming in from China,” said the former bureaucrat while rejecting the Chinese criticism.
On Saturday, the Department of Industry and Internal Trade (DPIIT) issued a press note that made the government route mandatory for all the FDI coming in from the countries that share land borders with India. It affects FDI coming in from China, Pakistan, Bangladesh, Nepal, Bhutan, Myanmar and Afghanistan.
DPIIT said that it was done to avoid opportunistic takeover of Indian companies that might have become an attractive option due to the Covid19 pandemic. Prior to that, stock market regulator SEBI also asked the Indian banks receiving any foreign portfolio investment to get the details of the beneficial owners of these investments.
The government swung into action as China’s Central Bank increased its share in HDFC above 1% this month. It prompted Congress leader Rahul Gandhi to ask the government to protect India’s strategic companies. Housing Development and Finance Corporation (HDFC) is India’s biggest mortgage lender and any minor change in its stake holding pattern was enough to sound alarm bells.
Read more:COVID-19 Lockdown: 96% of migrant workers without ration support from government
Following the move by China’s Central Bank, the Union government and other regulators have considerably increased scrutiny of the money flowing in from China.
It tweaked the FDI policy in such a way that made it difficult for Chinese investors to take control of Indian companies without the government’s knowledge and approval and It was done without singling out the country.
A Delhi based market analyst and economist, who works with the India office of a global sovereign rating agency, told ETV Bharat that there is a growing suspicion about Chinese investment, particularly security and privacy concerns.
“These Chinese companies can have a creeping investment in Indian companies over a period of time and by the time authorities realise it, the Chinese company may have acquired a significant stake, if not the majority stake,” he said while commenting on minor increase in Chinese bank’s investment in HDFC.
“This threat is there, it's good that the government has woken up,” he told ETV Bharat while requesting not to be named.
As expected, China was offended by the Indian decision.
How did China react to new FDI rules?
A Chinese embassy official in New Delhi Monday called it discriminatory and against the WTO's principle of non-discrimination.
The Chinese official called for a revision in the policy saying that it went against the general trend of liberalization and facilitation of trade and investment.
A charge rebutted by global trade experts and economists and global trade experts that ETV Bharat spoke to.
Experts question China over its FDI policy, trade practices
Trade experts and economists point out that Foreign Direct Investment in China is subjected to even greater scrutiny. They also highlight the stringent restrictions imposed by the Chinese government on movement of foreign capital in the country.
“Can anybody in the world invest in China without permission,” asks Ajay Dua.
He said China has no right to criticise Indian policy as the opacity in the working of China in the field of trade and commerce, investment, patents, and intellectual property rights far exceeds that of any other major economy in the world.
He also highlighted the problems faced by the foreign investors in China.
“In China, a foreign investor cannot transfer its money parked with a Chinese bank to a local entity without answering some questions. It may be possible if it is a foreign bank operating in China, but a Chinese bank will not comply with the instructions of a foreign customer without first asking questions,” Ajay Dua pointed out.
He said foreign investors also face similar restrictions when they want to take out their investment or profits out of China.
“In China, if a foreign investor wants to repatriate the profit or principal, a Chinese bank will not allow it without asking questions. They will not allow dividends to be sent back to the investing country so easily,” he told ETV Bharat.
Investment disputes rarely agitated at WTO
Though the Chinese embassy official in Delhi invoked the World Trade Organisation rules to demand revision of India’s FDI decision, experts, however, suggest that China is unlikely to get any relief at the global trade body.
“There are very few disputes on investment rules that have been taken to the WTO because WTO is essentially a trade organisation but its role is increasing over the period to cover investment disputes as well,” said Ajay Dua.
He said China cannot do anything even if India completely stops FDI investment coming in from the country.
Delhi based developmental economist, who was closely involved with India’s trade policy negotiations at WTO, said that there is no other global body where China can agitate this issue. He points out that the options available with these international organisations are very limited.
Can China get relief from WTO or any other forum
Ajay Dua said the World Trade Organisation’s rules governing the foreign direct investment or FII do not prohibit a member from scrutinising the foreign money coming in the country.
“Chinese are saying there is no reciprocity. I don’t think that Chinese can establish the charge at any forum, said Ajay Dua, adding that there is no other global body where China can agitate the matter and get any relief against India’s decision.
How US, EU nations deal with Chinese investment
The US has a senate level committee to vet all the investment coming in to the country. This panel is called CFIUS or the Committee on the Foreign Investment in the United States.
In 2018, CFIUS blocked Chinese company Hubei Xinyan from acquiring the country’s semiconductor testing company Xcerra.
This is not something new. In 2006, a strong resistance by the US law makers and other stakeholders over the national security concerns forced Dubai Ports World (DPW) to drop its plan to acquire operational management of six US seaports from a British company.
These fears have once again come back to haunt the US and its allies due to the economic slowdown caused by the outbreak of Covid-19 pandemic.
This week, Margrethe Vestager, the head of European Union’s anti-monopoly watchdog, suggested the governments should consider acquiring stakes in European companies to prevent their takeover by Chinese investors.
US action against Chinese giant Huawei
China might have objected to India’s decision to scrutinise FDI coming in from neighbouring countries, however, Chinese companies have faced even greater challenges in the US and other advanced economies. In some cases, they have been completely barred from investing or operating in the US and other advanced economies due to security and privacy concerns.
The US action against Chinese telecom and smart-phone manufacturer Huawei shows the level of mistrust western governments have about the intention of Chinese companies.
According to reports, the US Justice department indicted the company and its chief financial officer Meng Wanzhou, daughter of the company’s founder Ren Zhengfei, of stealing the US trade secrets and attempting to bypass the sanctions on Iran.
In December 2018, following a request by the US authorities, Men Wanzhou was detained in Canada and since then she is under house arrest in Vancouver, awaiting hearing of her extradition trial.
The Trump administration did not stop there. In 2019, the Trump administration severely restricted Huawei’s operations in the US. It prohibited US companies from buying telecom gear from Huawei.
Huawei is world’s largest telecom equipment manufacturer and second largest mobile phone manufacturer with a gross revenue of over $122 billion in 2019.
This year, the Chinese tech giant admitted that as a result of US sanctions, its revenue fell by $12 billion in 2019.
“A country can ban FDI on the grounds of security, for example, the investment by Chinese telecom giant Huawei was stopped by the USA and later Huawei was banned from investing into several other countries,” said Ajay Dua.
RCEP could have weakened India’s position
According to trade experts, today China may not be able to do much except protesting against India’s latest FDI rules, but the situation would have been completely different had India last year joined a regional trade bloc backed by China.
In November 2019, Prime Minister Modi decided to walk away from China backed Regional Comprehensive Economic Partnership (RCEP) at the last moment.
RCEP was to include 16 countries, 10 ASEAN members plus China, Japan, South Korea, Australia, New Zealand and India.
India’s decision to join RCEP would have made it the world’s largest free trade agreement (FTA), covering 3.6 billion people in 16 countries, accounting for 40% of the world trade and 35% of the global GDP.
“Had India joined RCEP then China could have objected to India’s new FDI guidelines, because a rule is there in the RCEP which prohibits discrimination against investment coming from a particular country,” noted Ajay Dua while highlighting the risks involved in hastily joining any trade deal backed by China.
