Checkmating China’s predatory potential is critically essential but mutually beneficial investments must have a mechanism

India recently updated its foreign direct investment rules. It expanded the scope of a rule that applied to Pakistan and Bangladesh to include partners with which India shares a land border “for curbing opportunistic takeovers/acquisitions of Indian companies due to the current Covid-19 pandemic”. An entity of a country, which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the Government route, it said.

This amendment expanded the scope to include all nations sharing borders with India, whereby they can invest in India only under the government route. This clearly and specifically seeks to put a check on China’s predatory attempts to use the current situation to acquire/consolidate its control on Indian businesses. Although foreign portfolio investments (FPI) rules are unchanged, market regulator Securities and Exchange Bank of India (SEBI) has alerted the custodian banks to furnish ultimate beneficiary details of the registered FPIs that are based out of China and Hong Kong.

The change seems prompted by China’s growing direct investments in India and a fear of hostile takeovers and predatory practices in a post-Covid scenario. The latest move came after Housing Development Finance Corp Ltd (HDFC) said that People’s Bank of China had raised its stake in the home lender from 0.8% to 1.01% in the March quarter through open market purchases. This revision of FDI policy is one of the first indications that India is watching. However, India continues to actively seek investments from investors in the US, EU, Japan and the rest of the world.

International Implications

The restriction is now imposed on all the countries that share borders with India — China, Bangladesh, Pakistan, Nepal, Sri Lanka, Bhutan and Burma. The impact on international relations will only be in respect of a reaction from China as other neighbouring countries have not been actively seeking direct investments into India. There is already a backlash on Chinese investments across the globe, so India is not out of place in putting such restrictions.

Moreover, the FDI policy revision is in no way restricting investors to fund ventures, but it is aimed at keeping a check on their activities to protect certain strategic sectors and ventures from predatory actions.

Considering China’s intent to consolidate its presence, it will continue to exert pressure on India for reversing this stand. It is also highly unlikely that relations will be severely affected due to China’s existing investments and its favourable positioning in the bilateral trade with India.

The ongoing lockdown has messed up with the cash flows of start-ups and they may be willing to offer attractive valuations for a capital infusion. The ventures with high cash burns will be most impacted and vulnerable. This is the best time for a predatory investor to sight new opportunities or consolidate existing ones.

In India

To check Chinese investments through such a change in policy, it is important to understand China’s investment history from an Indian context. China started actively exploring Indian investment opportunities since the last five years and has built a reasonable portfolio of investments in certain specialised businesses.

As per China Global Investment Tracker (CGIT), which tracks $100mn+ deals, Chinese investors have made a total cumulative direct investment of $14.5 billion up to December 2019. Of this ~$10 billion has been invested in the last three years. The India-China bilateral trade stood at $92.7 billion in FY20, up from $2.9 billion in FY01, which is just ~2% of China’s global trade. India runs a $55-billion trade deficit as 85% of this trade is import of goods from China.

Always Predatory

Since long, China has adopted a colonial model, whereby it actively uses trade to create dependencies amongst its trading partners. Dependencies come in on account of economies of scale because China can provide goods cheaper than the partner’s self-production costs. This naturally leads to the movement of manufacturing to China. China has developed a huge scale of manufacturing capabilities and transacted a foreign trade of $4.6 trillion in 2019. All its trading partners run a huge trade deficit on their trade with China.

While the dependencies get created, Chinese investors constantly seek investment opportunities to build/acquire businesses of critical importance and constantly creep in to consolidate their holdings. China’s dual standards can be seen by the fact that investments in sectors like finance, telecom and logistics are denied to foreign investors in China but open to China with its trading nations.

Seventy per cent of the Chinese investments across the globe are sovereign wealth funds, state-owned enterprises, state-owned banks or private sector firms backed by the state. In all these cases, the Chinese government is the Ultimate Beneficial Owner (UBO). The developed world has already experienced China’s motive behind making direct investments, which are not just economic but also to attain political and diplomatic influence. So it will be critical for India to learn from their experience and put checks and balances to safeguard its interests.

China And Europe

China has been making foreign direct investments in Europe since 2010 with a larger focus on the UK, Italy, Germany and France. Chinese FDI in the EU surpassed North America in 2018 and 2019. In fact, China’s FDI in the EU has grown 50 times in just 10 years. China’s direct investment in the EU over the last 10 years now totals to over $360 billion in around 400 companies.

China has been heavily investing across assets of strategic importance in the EU such as airports, ports, road and rail networks. It now holds 9.5% in Heathrow Airport, 49.9% in Toulouse Airport, 82.5% of Hahn Airport and has controlling stakes in airports in Tirana, Albania, Ljubljana and Slovenia.

China has invested Euro 7 billion in ports of Genoa and Trieste (Italy) and has acquired stakes in eight EU ports of Rotterdam (Netherlands), Antwerp (Belgium), Zeebrugge (Belgium), Bilbao (Spain), Valencia (Spain), Marseilles (France), Vado Ligure (Italy) and Piraeus (Greece). Fifteen EU countries (out of 28) have signed up for China’s Belt & Road Initiative (BRI). Italy, a recent entrant, is the only G7 country out of the EU, which has signed up for the BRI.

These are helping China build influence in the region apart from aiding smooth movement of its goods. Europe is waking up to the growing footprint of China and has now proposed a framework for screening FDI from China.

China & US

China’s FDI strategy in the US is to simply acquire US hi-tech manufacturing/know-how, own US highways, ports, railways and energy resources. Though the US is China’s biggest trading partner, it is now engaged in a trade war to correct the trade balance tilted in favour of China. The US has a trade deficit of ~$350 billion with China.

In the absence of a formal Bilateral Investment Treaty (BIT), China was having a free run in making investments in the US. Since President Donald Trump assumed office, he has done a lot to curb China’s relentless investments, including expanding the Committee on Foreign Investments in US (CFIUS) to review FDI; passing Foreign Investment Risk Review Modernisation Act (FIRMMA) in 2018 to curtail foreign ownership and give more powers to CFIUS; passing National Defence Authorisation Act for indigenisation in 2019, introducing measures to counter BRI and to block FDI by Chinese companies like Huawei.

All its leading trading nations have waged a trade war with China to balance their trade equations. India is likely to be US’ key accomplice in its trade war with China. Putting a check on China’s potential moves to predate Indian businesses seems to be inspired by the US experience. The US also made a bold move by banning US operations Huawei last year.


China claims that the revision directed at a few neighbouring nations violates the WTO’s principle of non-discrimination, which stipulates that a country will not discriminate amongst its trading partners. Non- discrimination is a key WTO policy and has two main principles:

  • Most Favoured Nation Obligation – prohibiting a country from discriminating between other countries

  • National Treatment Obligation – prohibiting a country from discriminating against other countries

China’s plea to the WTO could be justified, but India reserves the right to protect its businesses in these vulnerable times. India needs capital, technology and knowhow to boost its economy. As China has all these ingredients, India has to find a way around to provide them access to opportunities in India.

Learning from the world, unchecked investments have the potential to turn predatory, and India should put in place a mechanism to filter such investments in a way that it is mutually beneficial and does not compromise national interest.

The author is CEO of New Delhi-based Investx Alternate Solutions that provide advisory on Indian and international Alternate investments