Firm establishes presence in Bangladesh, Mongolia, Japan & South Korea
Dezan Shira & Associates, the pan-Asian foreign direct investment practice, have established formal relations with four new ‘Asian Alliance Partners’ – giving the firm a platform to further develop and assist clients throughout Asia. The four new partners are in Bangladesh, Japan, Mongolia & South Korea.
“These arrangements allow us to cooperate more closely with selected regional partners with contractual relationships in place governing service standards, collaborative marketing, fee sharing as well as better understanding regional cross border integration” says the practice Chairman, Chris Devonshire-Ellis. “Japan and South Korea are members of the recent RCEP agreement along with China and ASEAN, where we already have a mature, invested business presence. Bangladesh is a fast-growing alternative manufacturing destination with supply chains through to China, ASEAN, India and global markets, while Mongolia is a primary member of the Belt & Road Initiative and is benefiting from what is about to be a doubling of China-Russia bilateral trade to US$200 billion per annum.”
These additions bring the firms presence to 22 fully owned offices, 8 Alliance offices with partners and 4 liaison offices in Europe and the United States.
The expansion of the firm isn’t set to stop just yet. “We hope to conclude agreements later this year in Pakistan and Sri Lanka” says Devonshire-Ellis “and are starting to take an interest in Central Asia and Africa. lntra-Eurasian trade is developing with Central Asia being connected to South Asia during this decade, while China has invested in 70 ports around the African coastline. Global trade dynamics are changing, and we want to be where that action is happening.”
Dezan Shira & Associates: www.dezshira.com
For businesses looking at aspects of what is aimed at in the recent “China for 2035, the New Era” policy, the emergence of the new China follows the transition of the ongoing reform and opening up, originally put in place in the 1980’s by Deng Xiaoping. It comes under the banner of Socialism with Chinese Characteristics, or ‘Chinese Socialism’.
It is a very modernized form of Socialism and characterized by the deep traditions of China over some 3000 years. There are indications that some of the changing features of China are as common to Western nations, and developing nations, as they are to Chinese Socialism.
Marxism was connected to Communism emerging from Socialism, which followed Capitalism and Feudalism. A lot of isms. China’s development model has used raw Capitalism in part but moved largely from Feudalism – a country comprising a population of 90% peasants as recently as 1978 – to being a nation of working people.
Those who work in Agriculture, Manufacturing and the Service industries in China are “Working People”. In China today that would now be over 80% of the available population. Who is not a working person? Owners of businesses , large medium and small, who obtain their income from their shares in their business.
Staying with the Working People concept, the Central Government also works to provide a developing lifestyle for the Working People – where several issues reorientate.
Dictatorship of the Proletariat disappears, to be replaced by the Party and the Government containing Working People working to make the country positive for the working people. A real alignment replaces the previous Dictatorship of the Proletariat, which now hardly exists in today’s China – even as Western media often suggest otherwise.
China’s owner/managers today are not so far away from the managers of Western businesses who earn the vast majority of their personal income from their business income. The small businesses in towns and villages earn their income from their salaries more than from the profits.
This alignment of interests makes China, along with countries such as Germany, more aligned in defining who the Governments represent.
As part of their duty the Governments in these nations – hitherto defined as capitalist or social capitalist and socialist – are working to enable the companies of the nation prosper, both domestically and overseas, but for the benefit of the employees and the nation.
Chinese Socialism is becoming more closely aligned between SOE’s and Medium and Large Private Sector companies, where mixed ownership is increasingly moving them closer together as models, their managers being working people, even when managing, and their company ownership models contributing to employee welfare and national welfare. Both produce dividends to their owners – who are increasingly stabilizing institutions such as pension funds, insurance companies, and health providers.
The process of distribution of wealth is moving from taxation to income and dividend flows. I suspect that Chinese Socialism has more in common with Social capitalism of Northern Europe than the outdated class models of the early 19th Century.
The Communist Party of China has been reconfiguring the relationship of work to government and distribution of wealth in a way that gives it relevance to Capitalist nations, where business owners are a myriad of owners, and whose managers and employees are working people gaining most of their income from their salaries. The importance of the company is to stay at the leading edge of global development, and to provide profit to pay for healthy welfare for its employees, and dividends for its institutional shareholders.
China’s private sector and SOE shareholders are moving more to the redistribution of profits model for welfare and education and so on rather than in the UK and USA, where shareholders are increasingly hedge funds, private equity, and wealth management funds.
It is worth reflecting on how most of the West and the new East are now really close to each other in this regard. And how China has persisted to make SOE’s successful and share owned companies a close part of the national plan, and aligned with the SOE’s in different formats, but increasingly aligned formats.
The solutions to Western Governments challenges may be increasingly found in China. They have spent over 50 years studying Western government models and many more aspects of the West, such as health, education and the tax system, and have come up with prototypes that are working, and are based on western experiences – good and bad.
If China has innovated from the West – then surely the reverse is also true?
Chairman, Dezan Shira & Associates
Publisher, Asia Briefing
News that the Australian National Government in Canberra have withdrawn the two MoU its Victoria State signed off with China’s National Reform & Development Commission – an advisory body – are part of the on-going rancor between Beijing and Canberra. To date this spat between the two capitals – Canberra has essentially accused Beijing of undermining its sovereignty – has cost Australia about US$3 billion in lost exports over the past 12 months.
Matters are going to get far worse. Canberra is also set to cancel a lease that the Northern Territory State Government signed back in October 2015, when the Chinese-owned Landbridge Group won the bid for a lease of Port Darwin for 99-year lease and a payment of A$506 million. The contract price was more than 25 times the profit the port had earned over the preceding two years, and Landbridge also promised to invest A$200 million over a 25-year period. Cancelling that deal just 5 years into a long-term agreement is going to cost a lot of money. It will also result in a huge diplomatic row.
Similar issues are going on in the UK, where a Parliamentary Motion was passed accusing China of committing genocide in Xinjiang. I have warned about the dangers of diminishing the term ‘Genocide’ in the past, and while at present the security situation in Xinjiang is not ideal, it is not ideal for China either.
More insightful analysis reveals the truth behind the arguments Canberra and London have presented. In Canberra’s case there has been a disconnect between Federal and State policy, with Canberra passing laws to prevent States signing off deals with foreign governments without Canberra’s say-so. That only came in retroactively after the China deals – and over 1,000 others that Australian States such as Victoria had agreed to with many other countries such as Indonesia, Iran, and Syria – had been signed. Canberra changed Australian law to impose greater Central Government authority. It remains an irony in that doing so it mirrors Beijing’s political doctrine. But it was hardly China’s fault there were weaknesses in the links Australian between Federal and State Governments, it’s negligence by Australian lawmakers and politicians. Yet the fingers were pointed at Beijing as the convenient ‘baddie’ to cover up their own shortcomings – and distract attention away from them making a grab for increased powers aand taking these away from the elected representatives of Australia’s regional States.
In the case of Xinjiang, with a large population of some 13 million Sunni Muslims, (Uyghurs) Beijing has become concerned over the planned US military withdrawal from Afghanistan announced by Washington over a year ago. That will now take place by September 11 this year. Both ISIL
and the Taliban remain very active in Afghanistan, and with China sharing a border, Beijing is highly concerned about regional security. Just last week a bomb went off in Quetta, Pakistan, where the Chinese Ambassador was attending meetings. Xinjiang has a border with Pakistan too. With Joe Biden assuring the American public that “The threat to our homeland has been reduced and we can bring our troops home” no-one in the West has raised the issue about the implications for China.
In fact, they are very serious. The Uyghur Muslims are the same Sunni Muslims as the Taliban. Taking large numbers of the more impressionable into camps makes security sense until the Afghan peace process can be finalized. If China did not act in an assertive manner, terrorism could very easily spread throughout Xinjiang. Thousands could die. Terrorist violence and bombs could spread to other Chinese cities. At present, while the situation in Xinjiang is not ideal, bombs are not going off and people are not dying. This is why it is somewhat abhorrent for UK MPs to accuse China of Genocide. A Genocide would be what would happen if China did not place a security blanket over the region and get tough. It’s not great but the alternative is far worse.
Canberra blamed China for what was essentially weaknesses within its own legislation governing the relations between Federal and State Governments. That is dishonest.
The UK has accused China of Genocide. This is naïve and designed to deflect the still unresolved mess the British, along with the US Government created in Afghanistan.
Beijing wants predictability and consistency in its diplomatic relations with the West. Instead, it is being treated as a whipping boy. Politicians should make decisions based on facts and truth. There is very little of that being spread about right now when it comes to assessing China – meaning businessmen and investors need to take a long hard look at the mechanisms of politics, what is being said and where the truth lies. China is about to become the world’s largest, and most valuable consumer market by 2025. It is taking the rest of Asia along with it. Western based investors should take note – and take what their politicians are trying to tell them with a very large dose of skepticism.
Chairman, Dezan Shira & Associates
Publisher, Asia Briefing
Over the past two years we have seen many comings and goings on a global bilateral and multilateral basis, including trade. The United States has had its occasional moment of belligerence and ripped up Climate Treaties, Nuclear non-proliferation, and trade. Some of these it has repositioned, such as its important regional NAFTA trade with Canada and Mexico, now the USMCA.
China has been busy with new trade agreements, including the East Asia regional RCEP, Russia has been negotiating and drawing new countries via Free Trade deals with the Eurasian Economic Union. The EU has a (now quivering in fear) CAI with China and has been involved in other smaller deals, while remaining regionally dominant.
The United Kingdom however, post Brexit is now a country without a region. Instead, it appears to wish to align itself with Asia.
To some extent, this is perceptive: Asia is where future growth is to be obtained. The UK has signed up trade agreements with Singapore and Vietnam, while Prime Minister Boris Johnson has high hopes for a trade agreement with India, where he visits next week. So far, so good. But there is a problem: India doesn’t do trade deals that in any way would provide any meaningful access to India’s domestic markets. That is why it pulled out of RCEP, is why its regional SAARC FTA is moribund, and why it is interested in a deal with the Eurasian Economic Union and Central Asia instead. India’s only other trade agreement worth anything is with South America’s Mercosur, again with potential competitors safely thousands of miles distant.
The UK’s businesses are too powerful and determined for India to allow them domestic access. That is not compatible with India plc, capable of raising merry hell in the world’s largest democracy, with definitive threats to topple leaders and political parties. Any UK-India trade deal will be a paper tiger only.
That leaves Japan, in digital services, and Turkey, whose population is of emerging class, yet also to some extent bound by an existing agreement with the EU – a larger market. It’s not going to be enough.
The UK is keen to join Asia by virtue of a tenuous link through ownership of Pitcairn Island, a small territory of 47sqkm in the Pacific with a population of just 40. The UK is trying to get aboard the Comprehensive & Progressive Trans-Pacific Partnership (CPTPP) FTA as a result. That includes Australia, Canada, Japan, New Zealand, Brunei, Chile, Malaysia, Mexico, Peru, Singapore, and Vietnam. In total, CPTPP nations accounted for 8.4% of UK exports in 2019.
One admires the chutzpah – Pitcairn as a new Hong Kong anyone?
But even if the UK is successful with its application to join, it still leaves a huge gap in global export trade to make up.
Pitcairn Island. A bit like Hong Kong.
This means that ultimately, if the UK truly wishes to be part of the Asian trade dynamic, it needs to deal with China. That means toning down the rhetoric, swallowing some pride, and striking out on a different political and trade path to that of the United States. If the UK is not prepared to follow its Asian ambitions through by engaging with Beijing, it will fail. London has one other, and final alternative: re-engaging with the British Commonwealth. And that is a subject I shall address on Asia Briefing tomorrow.
Chairman, Dezan Shira & Associates
Publisher, Asia Briefing
There has been plenty of critical Western foreign media attention – and the threat of sanctions – over the situation in China’s Xinjiang Province. It is useful to recall that the criticism has come largely from the US and EU concerning Xinjiang. Both have trade issues with China, and there are some in the EU who wish to see the proposed CAI fail. The US is also scheduled to withdraw its troops from neighboring Afghanistan in just three weeks’ time – May 1. Both these issues are main impactors on China’s Xinjiang criticism.
In fact, neither the EU or US have significant investments into Xinjiang, although there are some cotton and computing ventures there. Most of Xinjiang’s FDI comes from Kazakhstan, South Korea, Russia, Turkey, the Gulf States and Pakistan. The United States has just 32 FIE’s registered in the Province and Germany, the EU’s largest nation, just 6. It is also fair to assume that these will have been established by Muslim immigrants, either Turkish or Pakistani. We examined the FDI makeup of Xinjiang this week in this article here.
I have travelled extensively in the region, which certainly has Muslim trading sensibilities. It is difficult to conduct business in the region as a foreigner without being aware of this and being sensitive to Islamic culture.
It is also telling that while the EU especially has been vociferous concerning the ‘abuse of Uyghurs’, the Arabic states have not, despite most of them – and Turkey – being predominantly Sunni Muslim, the same as the Uyghurs. The Arabic world has itself been quiet on the issue. It is aware of what is at stake here and especially the on-going Afghanistan Peace process which has just reached a critical stage.
Wang Yi, the Chinese Foreign Minister, recently visited the Gulf countries, Iran, and Turkey. The Uyghur issue will have been discussed and explained.
The EU/US position also relates to a recent definition of the term “genocide” which was adopted by the UN in the late 1990’s. It was expanded to include not just murder, torture, and rape, but also the forced redistribution of people, the suppression of culture and internment, all of which are lesser evils than for example murder. It is this redefinition of the term that has led to these accusations against China and has irritated Beijing. ‘Genocide’ is a very strong term; the EU’s use of it applies to it in its mildest, not strongest definition. It does appear to have been used in the weakest sense, and I can understand Beijing being offended. This is not Serbia in the 1990’s.
The PRC has also invited UN inspectors in to examine camps etc.
So why the camps?
Just under a year ago, the US did a deal with the Afghanistan Taliban to withdraw troops from the country. That should take effect on May 1 (3 weeks from now) and yet, insufficient Afghan military support has been put in place. If the US pull out more, or all their troops from Afghanistan it is quite likely to lead to a large movement of radicalized Islamic insurgents into China, which after all is just next door. To prevent that, China has increased Xinjiang security and detained Uyghurs it feels are sympathetic to radical Islam. In this way it hopes to prevent the spread of insurgents into China. There are 13 million Uyghurs in the country. Xinjiang could descend into a very nasty civil war zone itself if a very tight lid is not kept on it. That is an issue I further commented on here.
As concerns FDI and businesses in Xinjiang, the criticism is not affecting the Province much as most investors there are not Westerners anyway. Urumqi is Central Asia’s largest and wealthiest city and traders there come from all over Central Asia, not the EU. As long as peace and security continue to be maintained it will not be an issue. EU cotton can be sourced elsewhere from Bangladesh, India, Pakistan, or Uzbekistan. Or the United States! We examined the cotton sourcing alternatives here.
In terms of EU/US FDI into China, we are not seeing the Xinjiang issue affect this. Much of the EU/US FDI into the PRC is on China’s southern and eastern seaboard, and some 4,000km away from Xinjiang. There is little to no negative impact.
Consequently, there is little that foreign investors need to, or can do to ‘take a stand to protect Uyghurs’.
The West’s criticism of Xinjiang is unbalanced. It is also ill-thought out and could have other consequences that do not appear to occurred to many. In fact, the danger is that if this continues, the Islamic protective states in the Gulf, Iran, Turkey, and Islamic radicals elsewhere may become offended at Christian nations claiming moral protection over Muslims elsewhere. That could in turn lead to accusations of attempting to convert Uyghurs Muslims to Christianity, cries of ‘Crusaderism’ and lead to more violence – in Europe.
Chairman, Dezan Shira & Associates
Publisher, Asia Briefing
This week’s editorial is given over to the comments made last week by Robert Ford, a former US ambassador to Syria and Algeria and a senior fellow at the Middle East Institute for Near East Policy in Washington. The original text appeared in Asharq-Al-Awsat, a leading academic voice in Middle Eastern affairs. It is a thought-provoking critique of where China and Russia fit with the United States, and I reproduce it here as it has flown under the radar somewhat due to Easter and it being originally published in the Arabic press world and not the US media.
“The second half of March was not successful for American diplomacy. Secretary of State Blinken hosted China’s top two diplomats in Alaska on March 18, and he reminded the world media about American complaints against China, such as Xinjiang and Hong Kong and Chinese threats against Taiwan and Chinese economic pressure against countries like Australia. And then, Joe Biden on March 25 pledged not to allow China to become the leading country in the world.
Biden and Blinken must take this strong position against China because Biden needs votes from Republicans in the Congress for his priorities, such as reform of immigration laws and financing for new infrastructure construction. In addition, both men strongly believe America’s defense of human rights and democracy is vital to American legitimacy in the world.
But the public answer of China’s diplomatic team in Alaska was strong and angry. First, the Chinese reprimanded the Americans for diplomatic protocol violations. New American sanctions on China imposed on March 17 were not an appropriate welcome, the Chinese Foreign Minister emphasized. He pointed to the hypocrisy when Washington complains about Chinese economic pressure while at the same time it often applies sanctions. Chinese Communist Party Director for Foreign Affairs Yang Jiechi insisted that America is not the spokesman for international public opinion, and it should resolve its own domestic problems instead of trying to create new copies of American democracy abroad. Washington should stop its interventions to change regimes, and fix its own human rights failures, for example the problems with America’s black communities.
Above all, Yang stressed that Beijing rejects the American “rules-based world order”. According to China, this order comes from a small number of states only. China chooses to support an international system whose center is the United Nations.
After its slap of the Americans in Alaska, Chinese diplomacy enjoyed another success on March 23 when the Russian and Chinese foreign ministers met, and the public remarks of Sergei Lavrov completely resembled the Chinese words in Alaska. Lavrov also praised the United Nations’ appointment of a special investigator who will examine use by states of unilateral economic sanctions; the UN report will surely criticize American sanctions policy.
In my opinion China and Russia want the United Nations at the center of the world system because they both have a veto right in the Security Council and can block any United Nations action they do not like. Syria is an example of how a system under the United Nations handles a conflict.
Chinese diplomacy had more gains after the Russian meeting. China’s foreign minister arrived in Ankara on March 24 and news came of a Chinese investment worth two billion dollars in a road project in Istanbul. It is worth remembering that China provided one billion dollars in foreign exchange financing in 2019 to Turkey’s unstable economy and Turkey needs more investment. While America is criticizing President Recep Tayyip Erdogan’s human rights violations and threatening more sanctions, China is providing new financing.
Then in Tehran on March 27, the Chinese minister signed a long-term bilateral cooperation agreement that might lead to 400 billion dollars of investment in Iran’s infrastructure. It will bring Iran into China’s huge Belt and Road Initiative. China has also supported the Iranian position that Washington must move first to remove sanctions on Iran to restore the 2015 nuclear agreement.
And still the Chinese are busy. This week the Chinese foreign minister will visit Gulf countries where China has successfully used its Covid vaccine as a diplomatic tool in countries like Bahrain and the United Arab Emirates. (America has not exported any vaccine, and the Blinken has not yet visited the Middle East.) In another gesture to the Gulf, the Asian Infrastructure Investment Bank, a huge bank that the Chinese government established, will hold its sixth annual conference in Dubai next October.
Chinese success in the Middle East impedes American efforts in the region, especially with Iran. However, American influence will not disappear. After the Chinese minister’s visit to Bahrain the American naval base will remain. Bilateral relations between Washington and Abu Dhabi are good.
What concerns me more is the triangle of Washington-Moscow-Beijing. I am glad Biden invited Russia and China to participate in a conference in April about climate change. The three powers need to find ways to cooperate. To be frank, there are no angels in that triangle. All three states play the tough game of international politics. I am more concerned about the Russia-Chinese alignment against the United States geo-strategically. Russia’s economy is the same size as Italy’s, but it is still an important military and cyber power. Henry Kissinger 50 years ago achieved an indirect alliance with China that isolated Moscow in the triangle. Now America’s isolation in the triangle benefits America’s two biggest adversaries and China knows it.”
Chairman, Dezan Shira & Associates
Publisher, Asia Briefing
News has emerged concerning the amount of debt owed by the Government of Sudan to the United Kingdom. A report in Sunday’s Observer newspaper has claimed that the war-torn country owes Britain £861m, (US$1.187 billion) of which £684m (US$943 million) is interest, accounting for nearly 80% of the total amount due.
Because of this, Sudan, which is already facing unprecedented food scarcity in a debt-laden country where austerity is deepening, is coming under additional pressure to impose more austerity measures, including further reduction of its public spending and to slash oil subsidies, if it wants its debt re-mortgaged. In effect, the country is being pushed to sell its oil reserves for cheap – just to pay off the interest.
Sudan holds 5 trillion barrels of proven oil reserves, with this equivalent to 97.8 times its own annual consumption.
The UK government has said it is supporting Sudan’s economic recovery. “That’s why we are not currently pursuing Sudan for its unpaid debts and are committed to agreeing a comprehensive treatment of these instead” according to the Observer. Others disagree: Nick Dearden, director of Global Justice Now, said the UK was among those which had been “a force for more harm than good” following decades of Anglo-Egyptian rule of Sudan until 1956, and criticized how support was dependent on the rolling back of public spending. Dearden is quoted as saying “It’s really unconscionable that Britain continues to hold these loans as some form of leverage over Sudan’s government today.”
While these findings make disturbing reading and illustrate if correct a staggering amount of immorality within the financial methodology, it is also incredibly hypocritical: a great deal of UK and Western media and some academic institutions have meanwhile been hyper-critical of China loading up African and other countries with debt. In fact, the average rate of annual interest China typically charges for BRI loans is just 2% – the UK Government has been charging Sudan a compounded 12% per annum.
More recently, the UK and other Western nations have accused Beijing of Genocide against the Uyghur Muslims. I have travelled extensively around the Xinjiang region in the past and can state that while the situation in the region is far from ideal, it is not Beijing’s sole fault that this has developed. It is also not ‘Genocide’ in what was the accepted term until a re-interpretation in 1998. The Rome Treaty agreed back then expanded the definition, and rightly so to include other definitions which can be used objectively, racial, or religious persecution, apartheid, forcible transfer, and deportation. These now carry the same weight as murder, extermination, slavery, torture, and rape. The inclusion of these less dramatic offenses achieves three ends; the ability to highlight abuses when they occur, the diminishment of the word ‘genocide’ and the clubbing together of an abuse of race relations as a crime akin to murder. It is a step too far.
Rather than beat up China over the Uyghurs, the West would do better to understand the issues. While these are difficult terms and circumstances to accept, I can understand why Bejing is saying that what is happening in Xinjiang is not Genocide. With the West stating that China has been inflicting debt traps on emerging nations, a situation later found to be untrue, the West needs to be careful of whom it accuses of Genocide. It is a dirty, awful word designed to invoke images of mass genetic slaughter and atrocities. That is not what is happening in Xinjiang. But it is what the United States inflicted upon the American Indians, the British upon the Irish, the French against the Algerians and the Germans against the Jews. Those were atrocities. Genocide as a descriptive should not be used so lightly and the West diminishes its own history in doing so.
Chairman, Dezan Shira & Associates
Publisher, Asia Briefing
By Koushan Das, Dezan Shira & Associates, New Delhi
The COVID-19 virus in 2020 brought the global economies to a standstill impacting everything from manufacturing, trade, employment, services, and compelled governments to enact several policies to provide fiscal stimulus to the economy. India, similar to other emerging markets, was not immune to the pandemic, which had a significant impact on economic growth.
Despite witnessing a steady GDP deceleration in the last few years, the government has been able to attract significant and steady foreign direct investment (FDI) inflows in the last decade. In the first nine months of 2020-21, India attracted equity FDI of US$51.4 billion, up 40% compared to US$36.77 billion during the same period in the previous year.
In addition, the government’s focus on reducing complexities and compliances for investors coupled with investor-friendly policies have led to significant investments in the manufacturing sector in the last decade. Investors shifting from other countries in Asia to India has not only done so to cater to the country’s growing consumer market, but also to make India one of their major export hubs to cater to other economies.
As the pandemic hit in March 2020, the country faced a demand and supply shock. Demand shock in the form of reduced investments and consumption, and supply shock, due to disruptions in supply chain linkages and labor supply. After a slowdown in 2019, the economy witnessed a further contraction of 24.4% and 7.3% in Q1 and Q2 respectively of 2020 due to the pandemic.
To manage the growing uncertainties in the economy, the government and the central bank, undertook a multi-prong approach through fiscal policies, monetary measures, and structural reforms to manage the fall in demand and country-wide lockdown.
As lockdowns eased and construction/manufacturing picked up, India grew by 0.4% in Q3 in 2020 (Oct to Dec). In 2020-21, the GDP is set to fall 8% against an earlier estimate of 7.7%. For FY22, India is projected to grow at 12.8%, as per Fitch Ratings.
Creating a Conducive Environment
Despite all its potential, India has been perceived as a complex country by investors. Several factors influence their perception, such as bureaucratic restrictions, delays in land acquisition, contract enforcement, inconsistent policies, complex tax structures, and complicated labor compliances.
To ensure smoother operations for investors, the current government embarked on an ambitious program of regulatory reforms aimed at making it easier to do business in India. This pushed India’s ranking from 142nd (2014) to 63rd (2019) in the World Bank’s Ease of Doing Business Rankings.
Major reforms as per the World Bank’s Ease of Doing Business, implemented since 2014, are:
- Simplification of forms and other attachments required to set up a legal entity
- Digitization of several government departments such as incorporation and customs
- Single window for trade facilitation
- Digitization of land and property registration departments
- Resolution of insolvency through Insolvency and Bankruptcy Code
- Reduction in corporate taxes with higher reduction for manufacturing companies
- Introduction of Goods and Services Tax (GST) that has subsumed several other taxes at the Central and State level.
The key reforms undertaken by the government in the last few years also include:
- Goods and Services Tax
GST, one of the most important reforms in India, was introduced in 2017, subsuming almost all indirect taxes at the Central and State levels. This provided a simplified, single tax regime similar to other leading economies leading to a more efficient business environment.
- Insolvency and Bankruptcy Code
The Code introduced in 2016, aims to consolidate and amends the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms, and individuals on time.
- Labor Code
To simplify and consolidate the labor laws, the government introduced four Labor Codes (wages, industrial relations, social security, and occupational safety, health & working conditions) which subsumed several central government laws which are expected to provide a transparent system to suit the changing business environment.
- Increasing FDI limits
The government has opened up or increased the FDI limits in several sectors such as defense, civil aviation, railways, coal, mining, and insurance.
Recent Incentive Policies
In the pre-covid years, the government had been working on consistently improving the business environment to attract foreign investors. However, during the pandemic, the government went beyond its usual pace and relatively quickly introduced several incentive schemes to attract foreign manufacturers. These schemes have already attracted several major foreign and domestic manufacturers to the country and the trend is expected to continue as more industries are included within the policies.
The key policy introduced during the pandemic was the Production Linked Incentive Scheme (PLI) scheme, that provided incentive on the incremental sales of goods in certain target segments. Under the production-linked initiative (PLI), incentives were approved to boost domestic production, and to attract investment in mobile phone manufacturing and specified electronic components including assembly, testing, marking, and packaging (ATMP) units. In November 2020, this was further extended to 10 flagship sectors such as pharmaceuticals, automotive, and telecom.
The scheme has been highly successful in attracting not only domestic enterprises but also foreign companies. Companies such as Samsung, and contract manufacturers of Apple such as Foxconn Hon Hai, Wistron, and Pegatron have already received approval under the PLI mobile manufacturing scheme. In the electronic components segment, companies such as Visicon, Vitesco, and AT&S have also received approvals. As for the medical devices sector, companies such as Siemens and Wipro GE have been selected.
One of the crucial components that drive and sustain economic growth in a country is infrastructure, as it is critical for improving and maintaining the country’s manufacturing competitiveness leading to higher growth. The key challenges in India’s infrastructure sector are land acquisition policies, implementation delays, and the risk of project overruns due to bureaucratic delays. However, the current government has ensured to minimize such delays, reduce complexities, and improve transparency in projects in India to increase the pace of infrastructure projects.
The government launched the National Infrastructure Pipeline (NIP) for FY 2019-25, an INR 111-lakh-crore (US$1.5 trillion) group of infrastructure projects aimed at improving ease of living and business environment. Initially, it was earmarked for 6,835 projects, which was further expanded to 7,400 projects in 2021. Roads, housing, urban development, railways, conventional power, renewable energy, and irrigation account for the majority of the project value.
Under these infrastructure projects, several key programs solely focus on highways and railways that aim to reduce logistics costs. The government is developing several Industrial Corridor Projects as part of the National Industrial Corridor program, which is focused on the development of industrial cities and improve connectivity, that can compete with the top global investment destinations. In addition, the government had also established a Special Purpose Vehicle for construction, operation, and maintenance of dedicated freight corridors under the Dedicated Freight Corridor (DFC) that aims to decongest the existing rail network by constructing dedicated tracks for goods trains. Currently, the construction for both projects is in full swing.
Recent Developments – India and China
Historical economic and trade ties between India and China have been strong despite several geopolitical challenges. However, recent border tensions have led to relative deterioration in the bilateral ties impacting investments and trade.
Despite strict actions by the Indian government such as banning Chinese apps and restricting investments from countries with shared land borders (which includes China), the full-fledged deterioration of economic relations between India and China is highly unlikely. This is largely due to
the import dependency that some sectors in India have for Chinese inputs. This was also one of the reasons that the Indian government has aggressively pitched policies under the Atmanirbhar Bharat (Self-reliant India) program to ensure self-reliance. The Indian government is likely to safeguard longer-term considerations of security more proactively as it opens the door to new sources of investments to diversify.
Rising labor cost, US-China trade war, along with the need for supply chain diversification, has forced manufacturers to relocate to alternative locations in South and South East Asia. India along with ASEAN nations hopes to take advantage of this trend and continue to vie for investments.
Despite South East Asia being a highly competitive region, especially Vietnam, India has its own set of advantages that sets it apart from its competitors. In addition, some of the advantages are also applicable when comparing India to China for manufacturing purposes.
India’s advantages lie in areas such as:
- Stable democratic government with relatively consistent and investor-friendly policies
- Huge consumer market with the total population expected to increase to 1.4 billion by 2025
- Relatively low labor cost along with a growing educated workforce
- Huge youth population
- Growth in disposable income
- Rise in rural consumption
- Increase in urbanization – by 2030, around 42% of the population would be urbanized
- Significant investments in infrastructure that will increase supply chain linkages
- Part of key maritime trade route in the Indian Ocean
- Growing economic influence in the region
Despite its advantages, India continues to lag when compared to other competitive economies in trade linkages. Historically, India has been skeptical about the gains from trade agreements, which is not the case for counties in South East Asia, such as Vietnam. In most cases, India has not seen much of a difference in growth exports with countries with which it has a free trade agreement (FTA) compared to countries with which it doesn’t have an agreement.
In the case of the Regional Comprehensive Economic Partnership (RCEP), India opted out of the agreement in 2019, mostly over concerns related to cheaper imports, tariff commitments, circumvention of rules of origin, and impact on certain domestic sectors.
With fewer FTAs in place, there will be an impact on trade ties and investor sentiments. India needs to review its existing bilateral FTAs and enter into newer agreements with individual countries or trade bloc such as the EU if it wants to compete at all levels with South East Asian economies for investments.
Besides, India also needs to move up the value chain to ensure that reductions in tariffs under an FTA that they enter into has their intended impact, rather than an increase in the trade deficit for the country.
Although it is an uphill battle, India has all the crucial elements that can be utilized to make it one of the leading manufacturing hubs, not only in Asia but globally. However, the government can not only depend on its low labor costs and demographics, and need to continue investing in infrastructure, skill development, education, and ensure a relatively stable regulatory environment, if it wants to move up the global supply chain, which is a key prerequisite for global manufacturing investors.
Koushan Das oversees the management of client projects in India for Dezan Shira & Associates Business Intelligence Unit, providing strategic solutions for foreign companies seeking to enter into or expand operations within India. Koushan holds an MBA in International Business from the IILM University in Gurgaon, and a BE degree in Computer Technology.
By Adam Livermore, Dezan Shira & Associates
Three months after the UK officially left the European Union, the British government seems keen to make Asia a key focus for the future development of its global trade relationships. Trade with Europe is expected to decline, and the US has indicated its reluctance to prioritize the negotiation of a new FTA. Absent any other large, lucrative, and geographically close markets for UK products, exporters need to become comfortable with dealing with more distant and unfamiliar territories. Asia, with its huge population, increasingly integrated economies, and high levels of GDP growth, fits the bill.
However, promoting trade across the region will not be straightforward. Two countries (India and China) dominate the region in terms of population and are set to be the geopolitical powers in the region for decades to come, but it will be difficult for the UK to stay “onside” with both regimes as they increasingly go head-to-head in the region. Japan and Korea are mature economies, but it’s not clear whether there will be scope to generate substantial increases in exports to these countries. The remainder of Asia is primarily made up of countries that are growing quickly, but the only one among them with real heft in terms of market size (from a perspective of population and land area) is Indonesia. That country is still an unknown quantity to all but the larger multinationals and can be expected to be a difficult place in which to do business for the foreseeable future.
Turning to these countries individually, the priorities can see seen from the recent initiatives and statements coming from the policymakers. China is already a big market for UK companies. As the China-US relationship sours, Britain is keen to distance itself from the impending fray. Just last week Foreign Secretary, Dominic Raab, signaled that commercial relationships would be prioritized, and issues such as human rights abuses will not be allowed to seriously impede the efforts of UK companies looking to globalize. In his words, “If we restrict trade to countries with ECHR-levels of human rights, we’re not going to do many trade deals with the growth markets of the future”. That statement may have been prompted by concerns over expanding trade with China, but a similar reality also exists in several the mid-sized developing economies in the Asia region, such as Vietnam and Bangladesh.
Hong Kong may also become a hot potato, due to the legacy complexities that need to be dealt with as the “handover” to China increasingly goes off the rails. Hong Kong, like Singapore, may be a small jurisdiction in terms of population, but the demand for UK-sourced services (which makes up 43% of all UK exports) is much higher in those locations compared with other most other Asian countries. A realistic aim for UK in Hong Kong is probably to just try to slow the erosion of both influence and trade. Such an eventuality will probably also be acceptable to Beijing. Presumably both countries will look to avoid major blow-ups in the coming months.
While the UK will likely follow a “treading water” policy with China, it is apparently much more proactive in developing stronger ties with India. The Secretary of State for International Trade (Elizabeth Truss) was in India in February, presumably putting together the roadmap for signing of an FTA. Boris Johnson is expected to travel to India later in the year, which might be the catalyst for major progress in that area. There are major opportunities for both countries here. Both are strong in technology and complement each other as well. UK would be considered more “cutting edge”, while India has a far larger sheer number of people working in the sector. Outside of technology, India is looking to compete with China in terms of growing its manufacturing base. For that it needs foreign investment. Britain knows it will never be a low-cost production hub, so common ground exists in this area too. Before India can really challenge China in this area, it needs to make a lot of progress on its infrastructure. For that, finance, and planning (architects / civil engineers etc.) are required. That’s another area where the UK is strong. Having lost some degree of equal access to the UK market, we can assume UK companies active in these areas will be aggressively looking to India.
As China and India increasingly take the spotlight in Asia, Japan and Korea will be feeling marginalized. South Korea has an over-dependency on China already in terms of its trading relationships and would like to diversify. Japan, as an island nation like the UK, is going through a process of (relative) managed decline as its population shrinks and continues to age. These situations will prompt both countries to take an interest in dealing more with countries like the UK in the future. But their focus will be on South / Southeast Asia – economies closer to their own geographically and which will follow an economic development pattern which Japan and South Korea went through just a few generations ago. It’s unlikely either of these countries will become a game-changer for the UK.
That leaves Southeast Asia. An unknown quantity for most UK companies, it’s going to be a major engine for global growth in the coming decades. A recently signed FTA with Vietnam will provide better opportunities in the education, healthcare, infrastructure, and renewables sector. It will also encourage UK firms to setup production facilities in the country. While the Vietnamese domestic market is likely to lack the scale and purchasing power to be major consumers of most UK products, with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in place facilitating reduced trading barriers between signatory nations, Britain can utilize Vietnam as a backdoor into the much larger market that it has created (estimated at 13.5% of global GDP). Going forward, Britain will also hope to be invited into the CPTPP directly.
More important than Vietnam and other Southeast Asian nations however, from a strategic perspective, are Singapore and Indonesia. Singapore because of its pivotal role in the entire region. Concentrated knowledge about all the surrounding economies is available there. Finance for projects across the region is centralized there. As Southeast Asia grows, Singapore will be riding the crest of the wave. It is and will continue to be the gateway. As Britain manages a slow retreat from Hong Kong, it should be quietly encouraging Singapore. Indonesia, on the other hand, is not yet on the radar for many exporters, but it develops in a quiet and unassuming fashion. Some distance from most geopolitical disputes, and considered relatively benign by its neighbours, Indonesia is in an ideal situation to capitalize on problems experienced by “spotlight” countries – India and China. But even if those countries both develop smoothly in the coming years, Indonesia is still in a good place to benefit as the entire Asian geography takes centre-stage. It’s in a win-win situation. UK companies should be looking at where opportunities exist from a medium-long term perspective.
Adam Livermore is an equity partner at Dezan Shira & Associates. Born in London, he has been living in China for the past sixteen years and is proficient in Chinese and Japanese.
Adam is based in our Dalian office where he manages both client-facing resources as well as several internal functions for the firm. Adam has been exposed to most areas of the firm’s broad range of operations but has a particular specialization in the areas of Human Resources in China, relating to both the legal and administrative aspects. He also possesses a comprehensive understanding of the key legal and accounting topics related to foreign direct investment in China. Having overseen Dezan Shira’s Indian operations for the past several years, Adam is able to compare these two huge, yet fundamentally different economies, and can provide insights into their respective business cultures and the operational challenges foreign investors face.
A common mistake made by many Western based China observers – and global media, when it comes to China is to assume that the figurehead at the top of Government is in complete charge. This derives in part from the all-encompassing position of the US President, from whom an assumption is that top-down decisions filter down. The same, incorrect assumption is often levelled at the British Prime Minister of the day, and of most Western leaders. Taking up the responsibility for the pros and cons of their leadership, they are the characters most seen to be explaining and even appearing to own Government. This Western perceptive is also how people often view China. Common headlines refer to China as ‘autocratic’, a ‘dictatorship’ and other such dubious terms. However, China is far more subtle than this, and its days of dictators long gone.
The United States, and much of the West has not, and does not, understand that the Premier of China does not make policies. Xi Jinping might review policy in its final stages, he might sometimes announce them, but rarely, but he does not run China. He runs the Government.
The CPC and the Government of China have a very decentralized policy system, in which experts follow the “scientific method” over many years, even decades, until policies are tested, and tested again for linkage to other national priorities. The CPC makes policy, the Government implements. The policy groupings contain many from Government. But it is the CPC which leads the development of policy.
Therefore, the US placing sanctions on Chinese individuals – be it Carrie Lam, the Chief Executive of Hong Kong, Wang Chen, a member of the 25-person Politburo, one of China’s top decision-making bodies, or Tam Yiu-chung, the only Hong Konger on the committee to have drafted China’s national security law makes no sense. In China, it is viewed as individually spiteful. It is also frustrating for the China Government as it demonstrates that the US has no idea how to approach dialogue or direct targets, either for negative issues such as sanctions, or for positive issues such as trade talks and other more positive areas of cooperation.
The United States Government has erred in what it sees as targeting culpable individuals. This in turn is why the Alaska talks have deteriorated – Chinese diplomats, lawmakers and officials are made to feel as if they have been personally singled out and made individually responsible for national policy. No wonder the Chinese delegation referred to the US side as ‘condescending’ when seeming to ignore the entire Chinese Governmental decision-making process. The United States policy of placing sanction on individuals has had the effect of making the US as a country appear to be dealing with specific, targeted personnel and not with the Chinese Government.
It has the same approach to Russia, with US President Biden referring to Russian President Putin as ‘a killer’ when there is an entire state apparatus to contend with. While Putin is not everyone’s cup of tea, he is still the head of state of a powerful nation. Meanwhile, Mohammed Bin Salam, who the FBI stated was ‘culpable’ for the grisly murder of journalist Jamal Khashoggi, is not sanctioned. These are double standards, and the Chinese know this too.
The initial approach by the new Biden administration towards China and Russia has not been ideal. Instead of diplomacy, Washington’s modus operandi appears to be leaning towards making it personal. With negotiating more favorable trade terms with India next up, and an increasingly nationalistic Prime Minister Modi in power, the United States is potentially well on course to be having disagreements with just about everybody, making US-India talks even more important. Should they not proceed well, that should be indication enough that a re-think of how Washington engages with other countries Governments would be well overdue.
Chairman, Dezan Shira & Associates
Publisher, Asia Briefing