The coming China reset?

After having originated the SARS-Cov-2 virus, suppressed information, allowed its spread across the world, and then ruthlessly controlled it internally, China has been pursuing a very crass and unsubtle diplomatic and commercial agenda which is most likely to only exacerbate the fast growing global distrust of the country. See this detailed chronology of events.

It has tried to score diplomatic brownie points by offering supplies of protective gears, masks, testing kits and the like. Sample this and this about the ham handed nature of such efforts,

Often, Chinese officials tell counterparts abroad that they must publicly thank China in return for the shipments, say Western officials, executives and analysts with knowledge of the exchanges. “What is most striking to me is the extent to which the Chinese government appears to be demanding public displays of gratitude from other countries; this is certainly not in the tradition of the best humanitarian relief efforts,” said Elizabeth C. Economy, the director for Asia studies at the Council on Foreign Relations. “It seems strange to expect signed declarations of thanks from other countries in the midst of the crisis.”Commercially too, the Chinese have been too aggressive for their own good. In the hurry to reclaim lost ground on their profitability, Chinese companies have cut corners in quality and resorted to price gouging in their bids for large tenders called by various national governments.

The Spanish, Dutch, Turkish, Australia, Canadian, and Finnish governments have recently returned Chinese manufactured masks. The Chinese government have in turn come in public support of their companies, accusing the foreign governments of not "double checking" the products before their purchase.

There are reports of Chinese manufacturers indulging in price gouging on tenders issued by different countries for large scale purchases of N95 masks, PPEs, testing kits, ventilators etc. Further, the Chinese government too have been manipulating the compliance with orders placed on Chinese manufacturers in return for diplomatic .

The pandemic induced economic crisis looks increasingly likely to be the trigger for the unravelling of the massive debts accumulated by many African and other developing countries in recent years, of which the Chinese lending for the One Belt One Road (OBOR) projects form a major share. As the debt restructuring talks begin, it will be interesting to see how the Chinese react and how much willing they would be to take haircuts on their loans and the costs incurred. This assumes great significance given the scale of lending, especially last decade,

According to the China Africa Research Institute at U.S.-based Johns Hopkins University, the Chinese government, banks and contractors extended $143 billion in loans to African governments and their state-owned enterprises over a 17-year period from 2000.

The economic reliance on China was starkly brought out in the aftermath of the pandemic. There is now a growing urgency among developed countries to diversify away and reshore production facilities. Japan has taken the lead with making its policy explicit in this regard,

On... the postponement of Xi's Japan visit was announced, the Japanese government held a meeting of the Council on Investments for the Future. Abe, who chairs the council, said he wanted high value-added product manufacturing bases to come home to Japan... "Due to the coronavirus, fewer products are coming from China to Japan," Abe said. "People are worried about our supply chains." Of the products that rely heavily on a single country for manufacturing, "we should try to relocate high added value items to Japan," the leader said. "And for everything else, we should diversify to countries like those in ASEAN." Abe's remarks were clear. They came as disruptions hit the procurement of auto parts and other products for which Japan relies on China, seriously impacting corporate Japan's activities. And they asked for something more than the traditional "China plus one" concept, in which companies add a non-China location to diversify production. Abe was forming a "shift away from China" policy...

Such a trend would shake the foundation of China's long-standing growth model. In its emergency economic package adopted on April 7, the Japanese government called for the re-establishment of supply chains that have been hit by the virus's proliferation. It earmarked more than 240 billion yen (about $2.2 billion) in its supplementary budget plan for fiscal 2020 to assist domestic companies to move production back home or to diversify their production bases into Southeast Asia.

If the US too follows up with similar moves, a tipping point could happen with respect to exodus of businesses from China.

The ground is ready for strong post-coved 19 backlashes against Chinese even in countries like Italy. Sample this by Giacomino Nicolazzo about how the government of Matteo Renzi ended up virtually selling important parts of the Italian economy to the Chinese,

A blind eye was being turned to the way the Chinese were buying businesses in the financial, telecommunication, industrial, and fashion sectors of Italy’s economy, all of which take place in Milano. To be brief, China was getting away with purchases and acquisitions in violation of Italian law and EU Trade Agreements with the US and the UK - and no one in either of those countries (not Obama in the US or Cameron in the UK) said a thing in their country’s defense. As a matter of fact, much of it was hidden from the public in all three countries. In 2014, China infused the Italian economy with €5 billion through purchases of companies costing less than €100 million each. By the time Renzi left office (in disgrace) in 2016, Chinese acquisitions had exceeded €52 billion. When the dust settled, China owned more than 300 companies, representing 27% of the major Italian corporations.

The Bank of China now owns five major banks in Italy, all of which had been secretly (and illegally) propped up by Renzi using pilfered pension funds! Soon after, the China Milano Equity Exchange was opened and much of Italy’s wealth was being funneled back to the Chinese mainland. Chinese state entities own Italy’s major telecommunication corporation (Telecom) as well as its major utilities (ENI and ENEL). Upon entry into the telecommunication market, Huawei established a facility in Segrate, a suburb of Milano. It launched is first research center there and worked on the study of microwaves which has resulted in the possibly-dangerous technology we call 5G.

China also now owns controlling interest in Fiat-Chrysler, Prysmian and Terna. You will be surprised to know that when you put a set of Pirelli tires on your car, the profits are going to China. Yep, the Chinese colossus of ChemChina, a chemical industry titan, bought that company, too! Last but not least is Ferretti yachts, the most prestigious yacht builder in Europe. Incredibly, it is no longer owned by the Ferretti family. But the sector in which Chinese companies invested most was Italy’s profitable fashion industry. The Pinco Pallino, Miss Sixty, Sergio Tacchini, Roberta di Camerino and Mariella Burani brands have been acquired by 100%. Designer Salvatore Ferragamo sold 16% and Caruso sold 35%. The most famous case is Krizia, purchased in 2014 by Shenzhen Marisfrolg Fashion Company, one of the leaders of high-priced, ready-to-wear fashions in Asia.

Throughout all of these purchases and acquisitions, Renzi’s government afforded the Chinese unrestricted and unfettered access to Italy and its financial markets, many coming through without customs inspections. Quite literally, tens of thousands of Chinese came in through Milano (illegally) and went back out carrying money, technology, and corporate secrets. Thousands more were allowed to enter and disappeared into shadows of Milano and other manufacturing cities of Lombardy, only to surface in illegal sewing shops, producing knock-off designer clothes and slapping ‘Made In Italy’ labels on them. All with the tacit approval of the Renzi government. It was not until there was a change in the governing party in Italy that the sweatshops and the illegal entry and departure of Chinese nationals was stopped. Matteo Salvini, representing the Lega Nord party, closed Italy’s ports to immigrants and systematically began disassembling the sweatshops and deporting those in Italy illegally.

But his rise to power was short-lived. Italy is a communist country. Socialism is in the national DNA. Ways were found to remove Salvini, after which the communist party, under the direction of Giuseppe Conte, reopened the ports. Immediately, thousands of unvetted, undocumented refugees from the Middle East and East Africa began pouring in again. Access was again provided to the Chinese, under the old terms, and as a consequence thousands of Chinese, the majority from Wuhan, began arriving in Milano. In December of last year, the first inklings of a coronavirus were noticed in Lombardy - in the Chinese neighborhoods. There is no doubt amongst senior medical officials that the virus was brought here from China. By the end of January 2020 cases were being reported left and right. By mid-February the virus was beginning to seriously overload the Lombardy hospitals and medical clinics. They are now in a state of collapse.

This has lessons for India too. Chinese investments in Indian startups have been on the rise,

In the final quarter of 2019, deals involving Chinese investors totalled a record $1.4bn, according to figures from Refinitiv. Data provider Tracxn said Chinese funds invested in 54 funding rounds last year — the largest ever number — compared with just three in 2013 and more than double what it was in 2017. This has helped turn China into one of the biggest sources of funds for start-ups in India, joining well-established investors like Sequoia and SoftBank. Two-thirds of India’s start-ups valued at more than $1bn now have at least one Chinese VC investor. Alibaba has invested in payments group Paytm and food-delivery service Zomato, while fellow Chinese internet giant Tencent has backed car-hailing app Ola and Byju’s, an education start-up. Funds like Shunwei Capital and Morningside Ventures have also become more active, investing in start-ups including bike taxi app Rapido and ShareChat respectively.

India is an obvious market for Chinese entrepreneurs and businesses. Its similarity, size, and stage of development are attractions,

In years past, China’s entrepreneurial diaspora fanned out around the world, opening service businesses like restaurants and laundromats, and more recently selling a range of China-made consumer products. Today, companies like Club Factory embody the next iteration: entrepreneurs exporting innovative tech business models such as micro-lending platforms and short video apps. As the Chinese economy slows and domestic competition grows fiercer, the country’s tech entrepreneurs are looking increasingly to emerging markets.

A timely Brookings report by Ananth Krishnan estimates that Chinese investments in India has risen sharply since 2014, till when net investment was just $1.5 bn. It has since risen more than three-fold to $8 bn over the next three years in the formal Chinese Ministry of Commerce estimates, though the real Chinese origin investments are much higher. Infrastructure, automobiles, energy, real estate and consumer goods formed most of these investments. Interestingly, the Indian Commerce Ministry (DIPP) pegs the Chinese investment till end of 2017 to be just $2 bn!

Further, unlike pre-2014 sales-only approach, trade relationship has started to deepen with investments being made by Chinese companies, including controlling stakes, and a flow of funding, in particular, to the start-up sector. He writes,

When announced projects and planned investments are included, the total current and planned investment is three times the current figure, crossing at least US$26 billion. In greenfield investments and capital invested in acquiring or expanding existing facilities in India, Chinese companies have invested at least US$4.4 billion. Chinese companies have also invested in acquiring stakes in Indian companies, mostly in the pharmaceutical and the technology sectors, and participated in numerous funding rounds of Indian startups in the tech space. Another US$15 billion approximately is pledged by Chinese companies in investment plans or in bids for major infrastructure projects that are as yet unapproved. 

The report urges caution and the need for Indian government and regulators to keep watch on Chinese private investments given the close links between state and the private sector and the former's use of the latter as an instrument of foreign policy and state power projection. But it also points to the opportunity of engaging strategically with the Chinese private sector, which have extensive links to the Party, so as to promote India's own interests. 

So far, the focus of capital-hungry Indian startups and a foreign investment-seeking government has understandably been on attracting investment as well as know-how from China in helping them scale up. This has, however, arguably led to inadequate attention on the specific challenges of regulating investments from China. Chinese companies have escaped the kind of scrutiny in India that their investments have attracted in the West, despite several high-profile investments and acquisitions. Besides the current emphasis on investments, another likely reason is the assumption that investments from the Chinese private sector are entirely different from state-led investments. As we have established, the separation between the Chinese state and private business is blurry. Within China, the Chinese private sector, and particularly tech firms, work closely with the government and the Communist Party in pursuing many of its goals at home. This is especially true of the technology sector, which is widely seen as playing a key role in the party’s enforcement of digital authoritarianism at home, from surveillance to censorship.

India's consumer technology start-up scene has a very strong Chinese presence. Chinese entrepreneurs, startups, and investors have been rapidly expanding their presence in India. This is in addition to the dominant presence of majors like Alibaba, Tencent, and ByteDance (of TikTok fame).

Another report by Gateway House had this to say,

Such is their success that over the five years ending March 2020, 18 of India’s 30 unicorns are now Chinese-funded. TikTok, the video app, has 200 million subscribers and has overtaken YouTube in India. Alibaba, Tencent and ByteDance rival the U.S. penetration of Facebook, Amazon and Google in India. Chinese smartphones like Oppo and Xiaomi lead the Indian market with an estimated 72% share, leaving Samsung and Apple behind.

In the days ahead, as the relations between China and the west thaws and regulatory barriers mount, Chinese businesses and investors will find India among the most attractive of options. The democratic set-up, especially with state governments having considerable autonomy, will create the conditions for

In a recent development, People's Bank of China (PBoC) has picked up a 1.01 percent stake in HDFC. The bank itself is 73% owned by foreign investors. Alarmed by this, the Government of India amended the FDI policy by incorporating a clause which makes government approval mandatory for such investments,

"A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited. However, an entity of a country, which shares a land border with India or where the beneficial owner of investment into India is situated in or is a citizen of any such country, can invest only under the Government route."

The restrictions cover even change in FDI or exits from it. It will provide the government with the check on Chinese investments in startups and other sectors.

Update 1 (25.04.2020)

In the latest purge to remove those criticising his rule, Xi Jingping has removed Sun Lijun, the Vice-Minister at the Ministry of Public Security, one of the important leaders in the national police force.

NAR also has a good article on how Chinese influence over Djibouti is increasing and plunging the country into a debt trap.

Update 2 (06.05.2020)

Andreas Kluth writes about how China has been losing Europe on the back of its ham-handed and clumsy disinformation and intimidation campaigns. 

Bejing’s minions instead began spreading disinformation, apparently intended to paint the EU’s democracies as effete and authoritarian China as comparatively strong. In France, the Chinese embassy posted on its website a wild accusation that French retirement homes leave old people to die. In Italy, Chinese sock puppets disseminated tales that the coronavirus had in fact originated in Europe, or doctored video clips to show Romans playing the Chinese anthem in gratitude. In Germany, Chinese diplomats (unsuccessfully) urged government officials to heap public praise on China.

In response, the EU’s diplomatic service assembled a report on the disinformation campaigns being waged by China and that other usual suspect, Russia. China promptly made a bad situation worse, leaning on the publication’s authors to tone it down. At this, members of the European Parliament took even more umbrage and demanded assurances that the EU will not self-censor under Chinese pressure... Somehow, Chinese officials have managed to offend Europeans across the continent who usually agree on nothing. At the beginning of the year, the calendar for 2020 was filled with Sino-European summits celebrating ever deeper ties. Instead, the pandemic is likely to be the occasion for Europeans to begin emancipating themselves from a bad relationship.

Update 3 (17.06.2020)

Indian Express has an article analysing Chinese tech investments in Indian startups. Chinese are investors in 16 out of the country's 29 unicorns, with them being lead investors in 8 of them. Tencent and Alibaba being the largest investors.

Update 4 (26.12.2020)

Katsuji Nakazawa writes in NAR about China's soft power balance sheet,

A survey conducted this past summer by the Pew Research Center shows negative views of China at record highs in nine countries -- the U.S., U.K., Germany, South Korea, Australia, Canada, Spain, the Netherlands and Sweden. The results show China's strategy to improve its external image has failed.