India recalibrates FDI policy, China's R&D spending boom, and the political importance of this year's NPC


Welcome to today's The India China Newsletter.

In this issue, I'm looking at:
- India tweaking FDI restrictions on China
- Why foreign investors are flocking to China, despite all the politics, trade wars etc.
- China's R&D spending boom, and how India compares
- India's hidden costs from the border tensions
- The political importance of this year's National People's Congress
- How often did India figure in the People’s Daily in 2020 compared to other countries?


India, which put in stringent curbs on Chinese FDI in April 2020, is looking to somewhat calibrate its FDI policy. But this will not mean a return to an 'open door', the Economic Times reports:

The Centre is unlikely to adopt an open-door policy for Chinese investments anytime soon. However, the government is reportedly considering opening the door to foreign direct investment (FDI) to a limited extent where local manufacturing units don’t have sufficient capacity or in sectors extremely crucial to India’s interests.

Earlier, reports surfaced that the government was planning to start the process approve FDI proposals from Beijing on a “case-by-case” basis, lifting restrictions that were put in place to prevent opportunistic takeovers or acquisitions of Indian companies because of the pandemic.

Worth mentioning here is that security clearance would continue to be compulsory in all cases, and as a part of a standard operating guideline all investment proposals from Beijing are to be examined by the ministry-concerned, Also, the proposals will get clearance those from entities or investors based elsewhere but sending funds through Hong Kong and those that entail small investments by Chinese investors.

“Proposals are being examined as per three key guidelines... Any proposal entailing large investment would have to be in a critical area where there is minimal or negligible local presence,” a government official with knowledge of the matter told ET. He went on to add that these standard operating procedures(SOPs) direct the approval mechanism.


Michael Smith in the Australian Financial Review has a piece worth reflecting upon: despite all the politics, trade wars and decoupling talk, foreign investors have been flocking to China:

China’s factories used to be the symbol of its economic power. But these days its financial might is on display in the trading floors and asset managers’ offices in Hong Kong and Shanghai.

Investors from New York to London, Amsterdam and Auckland are scrambling to find a way into the world’s fastest-growing capital market.

Hungry for yield outside their zero-interest-rate home markets and unfazed by tensions between Beijing and Washington, investors are pouring billions of dollars into Chinese bonds, equities and other products.

Analysts say Beijing is entering a new phase of its rise, thanks to its $US16 trillion ($20 trillion) bond market and a wave of multibillion-dollar IPOs in Hong Kong, Shanghai and Shenzhen. Unperturbed by the international pushback against Xi Jinping’s increasingly authoritarian approach and threats of decoupling, foreign investors are expected to funnel billions of dollars more into Chinese bonds over the coming year. One asset manager is tipping at least another $US3 trillion ($3.8 trillion) over the next five years.


China’s spends on R&D grew by more than 10% in 2020:

China’s spending on research and development climbed 10.3% to 2.44 trillion Chinese yuan ($378 billion) in 2020, according to the nation’s National Bureau of Statistics.

The bureau said in a press release on Sunday that R&D spend, which looks to develop new services or products, accounted for 2.4% of China’s gross domestic product.

It’s a new record for China but it’s also the slowest incremental growth in five years and down from a 12.5% rise in 2019.

The bureau said that by the end of 2020, China had 522 “national key laboratories” and 350 “national engineering research centers” in operation.

It added that some 457,000 projects were funded by the National Natural Science Foundation of China last year and 3.6 million patents were granted, up from 40% on 2019.

By contrast, the U.S. was planning to spend around $134 billion on R&D in 2020, according to a report from the Federation of American Scientists last March. Official R&D spending figures are yet to be released by the U.S.


In my book (sorry for the book plug - I have endeavoured to keep those to a minimum and this is the first since I launched the newsletter, managed to last longer than I feared!), I devote a chapter to innovation in China and how investing in R&D and getting manufacturing right in many ways set the stage for what was to follow on the innovation side. India has a long, long way to go to catch up. I also mention in the book that there is some amount of complacency in assuming ‘free’ and ‘open’ countries are somehow naturally placed to be better innovators, even if history tells us, whether from the U.S. experience or China’s, without the right environment and enabling factors, that won’t count for much. This July 2019 report prepared by India’s economic advisory council to the Prime Minister on the R&D ecosystem had some interesting takeaways; given the economic hit of 2020, I’d be curious to see how the numbers turned out last year. From the report:

Gross Expenditure on R&D (GERD) has shown a consistently increasing trend over the years. • It has tripled in the last decade in nominal terms – from Rs. 24,117 crores in 2004-05 to an estimated Rs.1,04,864 crores in 2016-17. • As a fraction of GDP, public expenditures on R&D has been stagnant – between 0.6-0.7 percent of GDP – over the past two decades. • It is well below that in major nations such as the US (2.8), China (2.1), Israel (4.3) and Korea (4.2). 3. Segment Wise R&D Expend

There are only 26 Indian companies in the list of the top 2,500 global R&D spenders compared to 301 Chinese companies. 19 (of these 26) firms are in just three sectors: pharmaceuticals, automobiles and software. India has no firms in five of the top ten R&D sectors as opposed to China that has a presence in each of them.

Also interesting that the government has a far greater share in India than in China, and the private sector far less:


Recommend reading in full this cautionary piece in today’s Indian Express by India’s former chief of naval staff Adm. Arun Prakash on the costs of the new situation along the LAC and the lessons to be learnt:

India’s swift military response, backed by firm political resolve, came as an unpleasant surprise to China, and influenced its eventual decision to disengage. Possible “loss of face” in Beijing may see some in the Party and/or the People’s Liberation Army (PLA) pay the price for miscalculation. But even in the (unlikely) event that the status-quo ante is restored, China’s periodic transgressions have imposed costs on India which cannot be ignored. While the political consequences of these intrusions are being managed through legerdemain, it is the price being paid, in terms of economic and security penalties, which calls for attention.

The expenditure demanded by an unanticipated redeployment of 50,000-60,000 soldiers and their sustenance in the high-altitude, arctic conditions of Ladakh would be substantial. While the rapid troop build-up is testimony of India’s newly acquired, strategic airlift capability, it will extract a price in terms of wear and tear on the IAF’s transport and helicopter fleets. The cumulative costs of this military confrontation could, therefore, impose a significant burden on an already stressed defence budget and will impact on force modernisation plans. Relief at the ongoing disengagement must be tempered by the fact that this is just the latest act in the ongoing drama being played out by China along the LAC.

As mentioned in yesterday’s newsletter, all eyes in China will be on the National People’s Congress that kicks off on Friday, March 5. The other big meeting of the “two sessions” besides that of the legislature is the convening of the Chinese People’s Political Consultative Conference (CPPCC), the political advisory body (or upper house, if you will), which begins tomorrow. The Two Sessions are expected to run for around a week, and will end with a press meet by Premier Li Keqiang.

While there will be lots to watch out for on the policy side starting Friday, from the annual government work report to the new five year plan that will also be on the agenda at the NPC besides expected political changes in Hong Kong, Chris Buckley has a great piece in the New York Times today on the broader political context underpinning all of this that nicely sets the stage for the coming week:

 Xi Jinping has struck a confident posture as he looks to secure China’s prosperity and power in a post-Covid world, saying that the country is entering a time of opportunity when “the East is rising and the West is declining.”

But behind closed doors, China’s Communist Party leader has also issued a blunt caveat to officials: Do not count out our competitors, above all the United States.

“The biggest source of chaos in the present-day world is the United States,” Mr. Xi said, a county official in northwest China recounted in a speech published last week on a government website. He quoted Mr. Xi as saying: “The United States is the biggest threat to our country’s development and security.”

That warning, echoed in similar recent public comments by senior officials close to Mr. Xi, reinforces how he is seeking to balance confidence and caution as China strides ahead while other countries continue to grapple with the pandemic.

His double-sided pronouncements reflect an effort to keep China on guard because, despite its success at home, it faces deep distrust in Washington and other Western capitals. Although China is growing stronger, Mr. Xi has said, there are still many ways in which “the West is strong and the East is weak,” officials have recounted in speeches recently issued on local party websites.

Mr. Xi will unveil a long-term blueprint for navigating China in this new global environment later this week, when the Communist Party-controlled legislature, the National People’s Congress, gathers on Friday and convenes for about a week.

A chart from MERICS on how China fared on meeting its targets in the 13th Five Year Plan (2016-2020):

And finally…

You would think that India would have faired relatively prominently in the People’s Daily in 2020 considering the worst border crisis in decades, but you would be wrong.

Here’s how much coverage India got relative to other countries in the Communist Party’s official newspaper last year, via the China Media Project’s ‘Political Discourse’ report which was published on Sinocism:



From January 2020 all the way through September 2020, as tensions between China and the United States rankled, the US maintained a Tier 1 ranking on the CMP discourse scale. From October through the end of the year, the US cooled a bit, drawn down to Tier 2, where it joined the United Kingdom, Japan, France and Germany. This trend was carried through to January 2021.

In terms of numbers of articles mentioning the country, the US was in first position with 108 mentions. Coverage of the US dealt with such issues as climate change policy and Trump’s “America First” agenda; the UK’s blocking of the extradition to the US of Julian Assange; the “’anti-China’ farce” in US policy on Taiwan and Hong Kong; and Xi Jinping’s Davos 2021 speech and China’s global leadership. The US was followed by the UK and Japan, tied for second with 70 mentions, and France and Germany, each with 62 mentions.


The newsletter will be back on Friday with the take-aways from the opening day of the NPC.

Thank you for reading!