Today, China is seeing huge influx of tourists all over the place. From strained relations between the two countries, India and China are coming close to each other.

Last month, a strong Chinese delegation had visited India to do deals on a string of projects in India. This includes a contact between the highest economic policy makers of the two countries, namely, the Planning Commission of India and the Chinese National Development and Reforms Commission.

There are, no doubt, major issues between the two countries. China has shown large parts of India as its own territory in its official maps. The border tensions have prevailed as long as one can remember. The Chinese have chosen to put aside the border issues for better economic ties with India. This is a welcome change in the attitude of the Chinese leadership. There are possibly economic reasons behind this change of stance.

China’s economic policy is undergoing a major change of focus. This came out very clearly in course of an international conference in Shanghai last week. The Chinese speakers mentioned the huge accumulation of foreign exchange reserves and its utilisation. Until now, the reserves have been mainly put in buying US sovereign debt. However, the returns on US debt are next to nothing. Adjusted to fluctuation in exchange rates, the investments are depreciating in value. The authorities are no doubt concerned about the depreciation in the value of their assets.

One idea floated is to buy up assets overseas. Chinese have floated sovereign wealth fund, which invests its money in buying up companies and similar assets abroad. These attempts at investing their funds outside have rebounded. In Europe, in some cases buying up private companies is being criticised on the ground that the sovereign wealth funds are essentially state owned and buying up assets mean it is handing over companies to government hands, albeit a foreign government.

So then, what can the Chinese do? They are seeking to diversify their overseas investment from mainly western and developed countries. They are naturally looking for opportunities in Asia, which is the current growth driver of the global economy. The Chinese have invested heavily in the southeast Asian countries. It seems that their current emphasis on building investment-led economic relations with India is part of their overall strategy.

As will be seen from the results of the visit by the strong Chinese team in India, reportedly some 800 businessmen, the Chinese concluded a series of investment deals running up to some $5 billion to $6 billion. These include Chinese investments in a 2,500 MW renewable power plant, jointly with the Reliance Group involving investment of some $3 billion. China Development Bank will syndicate a $2 billion (over Rs. 11,000 crore) loan for Lanco Infratech’s two power projects. Several projects are being taken over for investment in the Indian railway network as well.

The other reason which is driving China to refashion its economic policy is the unsustainability of carrying on with its past economic development model. China had depended on the ever-rising investments to push its growth drive. This is cracking up. The huge capacities created can hardly be utilised given the slow down in the global economy. Exports could no longer be pushed up to Europe and USA. How to keep its massive manufacturing capacity humming?

Take for instance China steel production capacity. With installed capacity of producing 600 million tonnes of steel a year, this is far in excess of China’s domestic consumption. Therefore, to prevent shutting down of steel capacity and throwing steel workers out of job, China has to find alternative ways of using its capacity. This had become amply clear since the days of the 2008 global meltdown.

China is, therefore, resetting its strategy and integrating with the developing countries in Asian and Africa. Its investments, while creating infrastructure in various countries, are also pushing its exports. The Indian economy and its vast markets could be a primary target for China.

This will meet two objectives: China should be able to channel some of its overseas investments towards India, as well as push some of its exports into the country by way of contributions to the aided projects. Look at what is happening to Indian power projects. Almost all big power projects had been built recently with Chinese equipment. This has gone so far that the larger power plant equipment manufacturers are now protesting against the free entry of Chinese equipment in to Indian giant power projects. However, the attraction for Chinese equipment is the twin offer of full funding to the power equipment importers, coupled with low price. Chinese equipment is reportedly 30 per cent cheaper than comparable equipment produced elsewhere in the world.

In his characteristic flourish, Planning Commission deputy chairman, Montek Singh Ahluwalia, commented that the memoranda of understanding should be of such “magnitude and intensity” as to befit the two giant nations of Asia. That’s laudable and the two big countries should not engage in taking baby steps. But these also hide that there is a huge deficit in India’s trade with China. Despite all efforts, the market barriers in place in China have proved to be insurmountable to Indian exporters to that country.

Mr Ahluwalia envisages that India-China trade, which has been growing steadily and fast over the years, should now touch $100 billion from the current level of $74 billion. Rising trade is always good. But over one-third of the trade turnover is India’s deficit. Will the Chinese now agree to push up their purchases from India instead of only selling? (IPA Service)