Explained: Why Chinese firms are exploring investment opportunities in India

The recent report about People’s Bank of China (PBoC) buying stake in HDFC Limited shouldn’t come as a surprise; off late Chinese investors have been buying up strategically small stakes in Indian companies especially startup’s; the startups need funding and for them, it’s easy to access to much-needed capital. Of late China has emerged one of the fastest-growing sources of Foreign Direct Investment (FDI), especially in the Indian startup ecosystem. According to a recent study by the Brookings Institution, India the biggest challenge is accurately mapping Chinese investments in India due to lack of a comprehensive single point database availability.

India-China Economic and Cultural (ICEC) Council estimates that in the last three years, Chinese and Chinese-origin investors have invested about $3.7 billion (Rs 23,600 crore) into Indian startups. China is also the biggest trading partner of India, and India the largest project-contracting market for Chinese companies in South Asia outside the digital and startup space. China’s investments have traditionally been concentrated in the automobile industry, however, major beneficiaries are around 25 startups, including Truebil, Ixigo, Paytm, Flipkart and MakeMyTrip. According to domain experts, Chinese investors are in for a long haul in comparison to their western counterparts.

Ola, India’s largest cab-hailing service had raised $50 million at a valuation of roughly $4.3 billion from Hong Kong-based Sailing Capital and the China-Eurasian Economic Cooperation Fund (CEECF), as part of the SoftBank-backed startup’s move to raise fresh funds of at least $1 billion. Sailing and CEECF, a state-backed investment fund of China, will hold a combined stake of more than 1 per cent in Ola. According to a report, Chinese investments into India’s startups and digital platforms represent a new take on the tried and tested China plus one model – shifting or expanding operations out of China to benefit from cheaper labour, new markets, and less domestic vulnerability. In three major ways, however, Chinese companies are expanding on China plus one model to enhance their access to Indian markets, and deepen their presence in the burgeoning digital economy.

Currently, multiple Chinese venture capital funds, are considering buying stakes in Indian startups, ranging from those innovating financial and education technology to e-commerce, content, and online classifieds platforms. In May 2018, China’s leading state-run bank, The Industrial and Commercial Bank of China, publicised the launch of its first India-dedicated publicly offered investment fund. The Industrial and Commercial Bank Credit Suisse India Market Fund, it will track the following sectors for investments – financial industry, information technology, alternative consumption, energy, essential consumption, raw materials, and healthcare, among others.

India’s startup environment is third largest in the world and it may appear to be exciting times, wherein one of the major global economic players is showing keen interest. But as they say, nothing is altruistic in nature, especially in business. Chinese investments into Indian markets is not a one-off event rather it follows a pattern of similar investments across the globe. Chinese investors have been investing in the US, EU, Germany, Australia, France, Italy, Canada over the past few years, especially in the backdrop of the 2008 global financial crisis these investments have increased in volume. Chinese firms have been trying to buy a stake in western firms, which are involved, especially involved in IT, AI, construction, energy, telecom, utilities etc.

But Chinese investment in the United States after hitting record levels and, are now attracting enhanced official scrutiny for potential national security risks; the Committee on Foreign Investment in the United States (CFIUS) conducts reviews. The number of such cases has increased from 155 In 2016, the latest year for which data exist, a total of 172 notices were filed for ‘review’ with CFIUS compared to 155 notices submitted in 2008. The United States has blocked several proposed deals by Chinese firms due to security concerns. Similar measures are being put in place by many European Union countries like Germany, Italy, France. Apart from them Canada and Australia have also enhanced scrutiny of Chinese investments in their country especially in their critical infrastructure sectors which have national security implications.

It is an understandable response by the US—and other like-minded states—is to intensify its scrutiny of the national security risks such inbound transactions might pose domestically, particularly in sectors that even the most advanced of countries consider ‘sensitive’. Some of the industries that used to not be considered ‘sensitive’ have begun to be treated so as it becomes more apparent that there is the involvement of a foreign government with ulterior objectives that owns or controls the entity pursuing the investment. Problem is that an increasing number of these foreign investors are from nations where there is significant involvement in business decisions by governments whose agendas are perceived to go way beyond commercial objectives.

In India’s case, we need to become cautious to such means of stealth investment in our economy. It may be recalled that Chinese in early 2000s started investing in media companies across the continent as part of it wider public engagement exercise by investing gradually and raising stakes in them, now they are using that to influence what gets published in the media. Recently, there were reports coming out of Africa that media houses having Chinese stakeholders have begun censuring stories which aren’t favourable to them. The recent global debate with respect to Huawei has raised genuine concerns with respect to national security infrastructure, corporate espionage and individual privacy. Chinese firms have had a dubious track record when it to honouring proprietary technology and information; hardware-based hacking of big US corporations had highlighted the concerns with the near Chinese monopoly on global supply chains.

India needs to be vigilant, as a country, about such investments, in our startups as well as other institutions, as they will be critical to the economic development of the country in future, especially when startups will mature to the MSMEs. The need of the hour is to a have system in place which acts as a screening authority for such investment proposals i.e. Know Your Investor (KYI), whose database needs to be maintained and published by the SEBI. India’s tryst with its bureaucracy has not been business-friendly, but we need to ensure a balance in order to make the startups thrive as well as protect our national security interests as well as individual privacy of Indian users.

Chinese have been practising salami-slicing strategy in the geopolitical space, it can be now be said that they have been practising the same in geo-economic space as well.

(Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL)