The Hindu Business Line : Business defines Sino-Indian relations

The Petroleum Minister, Mr Mani Shankar Aiyar, in conversation with Mr Wang Jinzhen (left), Assistant Chairman, China Council for Promotion on International Trade, during the Chinese Premier, Mr Wen Jiabao's visit to New Delhi... Strengthening trade ties further. — Sandeep Saxena

UNTIL RECENTLY, China was a worthy rival to India, not only in the political domain but also in the business arena, as Beijing aggressively pushed global trade. This was a cause for concern to New Delhi, as the trade pattern of the two countries are complementary.

However, till two years ago, no one would have imagined that China would emerge the engine for India's export growth.

In 2004-05 (April-November) China was India's second biggest trade partner and the second biggest destination for India's exports. In 2002-03, it was ranked the sixth export destination.

Interestingly, during these three years, India's exports logged highest growth. In 2002-03 and 2003-04, India's exports grew at over 20 per cent and in the first nine months of the current year, they soared to 29 per cent, though the global trade was dismal.

China had become the catalyst for India's peak export growth, as evident from its contribution reaching 2.3 per cent during 2002-03 to 2004-05 (April-November) compared to the US' 1.4 per cent.

What has made China the major destination for Indian exports?

It was China's hunger for raw materials, intermediates and components.

Exports of iron ore to China more than doubled this year, pushing Japan to the second place.

Iron ore constitutes around 40 per cent of India's exports to China. The other major exports were plastic materials, steel, chemicals and soyabean oil.

The sudden predominance of China in India's exports has, however, raised two crucial issues: Whether the exports to China will sustain and whether they will exceed that to the US.

It is not unrealistic to forecast that if its economy continues to be as robust, China will, in the near future,overtake the US.

Which means, the demand for imports of raw materials, intermediates and components and parts will continue to rise.

According to a forecast by The Economist of London, China's imports are expected to surge at the rate of 17-18 per cent a year till 2008.

China and the US are the two engines of world economy, which grew by 3 per cent in 2002, 3.9 per cent in 2003 and is projected to grow by 4.6 per cent in 2004, according to the IMF.

China contributed 27.7 per cent to the global economic growth in 2003, the highest among all nations.

The global trade increased by 16.1 per cent in 2003 and China was the top contributor. In 2003, China contributed 10.9 per cent to the global export growth and 11.2 per cent to the world import growth. In 2003, China's exports increased by 34.6 per cent and imports by 39.9 per cent.

China's imports are likely to remain high, considering its growing GDP. The Economist forecast China's GDP to grow between 7.7 per cent and 8.7 per cent from 2004 to 2008.

Alongside, exports are expected to surge 14-20 per cent during this period.

Then, China has the advantage of a huge domestic demand. So the country is well insulated from any over-heating.

The Economist has forecast that the upward in FDI (foreign direct investment) flows to China will be sustained and help in gearing up the economy this decade. It estimated that FDI would touch $79 billion by 2008, up 44 per cent from $55 billion in 2003.

The cheap labour and good infrastructure are the main attractions for foreign investors.

China has been attractive enough for MNCs to shift their manufacturing there. A number of Japanese firms relocated their factories to China to produce goods cheap.

Interestingly, a large part of the goods produced in these relocated factories went to meet the domestic demand of Japan and expand the exports of the Japanese MNCs.

Thus, China's potential as world's biggest manufacturing hub is unlikely to be affected in the near future.

Not just for India, China has turned friendlier towards a number of South-East Asian countries.

For instance, for Asean-4 (Thailand, Malaysia, Indonesia and the Philippines), China has emerged the next generation export market after Beijing entered the World Trade Organisation.

The combined exports of Asean-4 to China soared by 196 per cent from 2001 to 2003.

In fact, for these four, China has emerged the engine for export growth, replacing the US as their biggest export market.

China's ubiquitous growth in trade and economy and its predominance in global trade turn it into a springboard for several developing and developed countries.

The air is taken out of the fears of a Chinese bubble as the country rests on the strong pillars of large domestic demand and cheap labour.

Its saving ratio is as high as 40 per cent, which insulates it from any fears of foreign investments flying away.

And, China's entry into the WTO has opened up numerous areas with huge investment potential.

In this perspective, India should create an atmosphere to foster closer trade and economic ties with China.

The difference between China and Pakistan is that while for Islamabad politics dictates business, for Beijing it is business that takes the precedence.

Also, China appears quite eager to partner India to conquer Asia Inc. Boundary disputes can wait.

(The author is a Senior Researcher with a Japanese MNC in New Delhi.)

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