Back RSTV -

Reviewing Chinese FDI

1. As China is on a buying spree at the time of coronavirus pandemic induced economic downturn, the countries are reconsidering relations with China.

2. India is one of the latest countries to join the move to resist hostile business takeovers by China.

How nations are rethinking their FDI policy?

1. The European Union was among the first to tighten foreign investment rules in recent times.

2. Countries have been tightening rules on foreign investments in critical sectors to safeguard their economies from becoming vulnerable and exposed to foreign hands.

3. Australia has made all investments to come under review in future. So the government approval would be required to invest in Australia.

4. Concerned about the Chinese hostile takeovers the UK, Germany and Italy are also thinking of putting similar safeguards in place.

5. The USA has been deterring the Huawei investments and acquisitions for strategic concerns.

Why is Chinese investment a threat?

1. China’s intentions and actions during the coronavirus pandemic are against the interest of other countries.

2. China is exploiting globalization in a way that's harmful to other countries around the world.

3. China so far has been increasing its presence and power by acquiring companies in other countries.

4. Companies considered to be vital to national security cannot be allowed to fall prey for predatory acquisitions.

5. There is a need to protect economies from becoming over-dependent on China that may not be in their interest.

6. Approximately 80% of the companies in China are directly or indirectly controlled by the government and China has a cash chest of more than 3 trillion dollars.

7. By investing just 80% of it and buying up shares at low prices at the time of crisis, China can dominate the stock markets and companies all over the world.

8. Foreign investments bring money, management practices, technology transfer, advanced technology etc. But, China is not willing to part with its technology at all.

9. The Chinese have a different set of management principles. But India basically follows the Western model of management practices i.e. an open system involving transparent decision-making, responsibility towards the Board of Directors, the shareholders etc.

10. Already there is too much dependence on China. For instance, about 97% of the antibiotics in the United States are imported from China and India is dependent on about 70-80% of the requirement of the active pharmaceutical ingredients (APIs).

11. Also, the WTO has no agreement on investment yet. It is under consideration and the mandate also has not been obtained to start negotiation on investment facilitation.

What are the avenues for FDI in India?

There are two avenues open for foreign investors

1. Automatic approval route

a) It allows investors to invest and inform the Government of India within a prescribed period.

b) Except for a few strategic industries like atomic energy, space etc. everything else is open.

c) But there are sectorial investment caps like in banking, insurance etc.

2. Government approval route

a) In this, the government’s approval has to be taken first before investing.

b) Pakistan and Bangladesh were in this category and now have been extended to include all the neighboring countries having a land border: Myanmar, Bhutan, Nepal and China.

Which were the reasons for extension?

1. While India has not put a complete ban on Chinese investments, the government will scrutinize and allow them on a case-to-case basis.

2. People's Bank of China has raised its stakes from 0.8% to 1.01% in HDFC.

3. Chinese investments in India have been in a few industries and with approximately 17-18% of its entire investment in pharmaceutical companies.

4. Out of around the 23 unicorns (companies which are worth more than 1 billion dollars), the majority of them have some Chinese investment or the other.

5. So, the decision of extension of government approval route has been taken to prevent opportunistic takeovers and acquisitions and destabilization of the market.

6. As the Indian stock market is down, short term foreign investments for profit-taking in a strategically important sector could destabilize the economy.

7. It is also done to avoid over-dependence on China for the pharmaceutical industry especially the active pharmaceuticals.