Some Areas of Concern

2.4 Some Areas of Concern

While the performance of China has been exceptional, for bilateral trade there are, of course, many areas of concern, some of which have special significance for India. First, China is experiencing large and increasing inequalities within the economy. Several regions close to India (especially in South West China) are among the laggards in development. There are several government initiated special programmes to help the under-developed regions, which include public investment

as well as preferential treatment for FDI in these areas 14 . These regions border on India, so they may be of special interest to India in terms of trade as well as

investment policy. Second, as noted above, growth in investment has been very high, perhaps

excessive from a prudential point of view. There are major risks pertaining to the poor quality and viability of investments. There are various government efforts to rein in investment and to stimulate consumption. So far success in these efforts has been modest. In case investment slows down, it may have implications for India’s exports of iron ore and other raw materials.

13 For more discussion on the issue, see Wilson and Purushothaman (2003); Holz (2008) and OECD (2012). 14 Efficacy of Chinese regional policy in reducing FDI regional disparity is discussed in the literature. For

further discussion, see Yu, Tan and Xin (2008).

The third issue is that raised by the exchange rate policy of China. The country has followed a policy of pegging the renminbi or yuan to the US dollar for more than

a decade. Between 2000 and 2005, the renminbi was allowed to trade against the dollar within a narrow range of 8.276-8.280 and has not been allowed to appreciate in synchronisation with the gradual accumulation of foreign exchange reserves and

a growing trade surplus. The Chinese trade surplus to the world increased significantly. The trade surplus with the US has been even larger. As the US dollar has tended to depreciate in the recent years with respect to the world’s major currencies, a pegged exchange rate has led to depreciation of the Chinese currency. An artificially depreciated exchange rate can provide broad-based protection from imports and can be of special help to exports. With the large and continuing trade surplus of China with the US, there are pressures from the latter on China to appreciate its exchange rate to actual level. China accordingly, relaxed the exchange rate regime in August 2005 when government suspended the policy of gradual appreciation in late 2008 through early 2009, the renewed tie of the renminbi to the dollar resulted in appreciation of real effective exchange rate. However, Chinese authorities removed fixed tie to dollar in mid 2010 and allowed to appreciate gradually. 15

During the last few years, India’s competitiveness has suffered from a sharp appreciation of Indian rupee vis-à-vis the dollar. So far China has been resisting a major appreciation of the renminbi or the floating of the currency. However, if China does revalue the renminbi in relation to the US$ in a major way or agrees to float the currency leading to significant appreciation of the same, it should result in a relative strengthening of competitiveness of India’s goods vis-à-vis China. The expectation is that China will allow the renminbi to appreciate in a very gradual manner rather than revaluing it suddenly.

Fourth, there are concerns relating to a weak financial sector in China which is reeling under the heavy burden of non-performing assets (NPA) estimated to be upto 50 per cent. The government keeps bailing out the banks and financial sector (Wang, 2007; Lu, Feng and Yao, 2009). NPAs have accumulated over the years in the form of subsidised credits extended generously to the state-owned enterprises (SOEs) that form the backbone of the economy. The SOEs are also not required to pay dividend to the government. It is because of such policies and due to other forms of subsidisation of labour costs of enterprises by local governments and municipalities that many countries are not willing to offer a market economy status to China. China, as the target of the largest number of anti-dumping cases, seeks market economy status in bilateral negotiations with different countries and is slowly moving towards financial sector reforms and prudential regulation of capital markets due to growing international pressure. The grant of market economy status to China by India could be considered once the transparent and prudential norms for capital markets have been established and financial sector reforms have been completed.

15 For details, see Cline (2012).

Finally, an interesting development is the increasing outward orientation of Chinese investment especially in resource-rich areas like Africa. The increasing

outward orientation is the result of huge reserves accumulated over the years from its trade surpluses since the mid-1990s. This trend is set to rise further in the coming years as China’s mega investment plans in Africa materialise. Further, China is pursuing its ‘going global’ strategy effectively as can be seen from the formalising of regulations to help investors to invest abroad. In 2006, the State Administration of Foreign Exchange abolished quotas on the purchase of foreign exchange for overseas investment. However, most of these investments abroad are ‘resource- seeking’ in orientation. Some Chinese companies are now actively considering plans to set up an integrated steel plant in India. In 2007, China decided to set up an agency to manage more aggressively a considerable portion of its foreign exchange reserves for offshore investments following the Singapore model.

There are many other challenges in China’s growth story, for example - the massive and growing demand for energy, minerals and other natural resources and their increasing prices, environmental degradation and climate change resulting from rapid growth, widening inequalities between regions and emerging social tensions, governance and democracy, etc. which may have some implications for India’s development but are beyond the scope of the present study.