A new look at the China-India perspective

By Chris Devonshire-Ellis
An important aspect of the Silk Road overland route is how it seeks out energy sources. China is energy poor as a nation and must import. In fact, much of the media attention of Chinese companies investing overseas as a trend that would boost other economies worldwide is overly optimistic – many of the investments made have actually been conducted by Chinese State Owned Entities buying up mineral and related oil and gas reserves.
This impetus of acquiring access to energy resources is a cornerstone of the Central Government’s foreign investment policy. Historians may recall that back in the early 1980’s, the then Premier Deng Xiaoping discovered that China’s oil reserves would last just two weeks. That incident sparked off a major search for global energy resources, resulted in a complete overhaul of China’s Oil and Gas industry, and paved the way for the first large scale foreign investment into China – oil and gas exploration in the South China Sea. It is arguable that this also resulted in China’s need to develop and reform its entire economy and bring in foreign investment. Had that incident not happened, and China had been faced with an acute energy crisis amongst its population, it is possible we may be in the hands of a very different China today. Consequently, the Chinese Communist Party (CCP) learned its lesson: energy is literally, the key to holding power.
As we have seen, China has been making great strides in investing in improving and building new rail and road infrastructures in the northern routes across Central Asia, north of the Himalayan, Pamir and Altai mountain ranges. Those routes, although technically difficult, are in some ways easier to solve from a diplomatic perspective as China has good relations with these nations, and they wish to sell their energy reserves in return. The southern routes though, which should be technically easier, come up against a major diplomatic problem: India.
India is a key partner to be won over if these routes are to be wholly successful. However, since a nasty, if brief border war in 1962, relations between the two, although improving, have been prickly. In addition to that, India’s own primary political and security concern, Pakistan, is a close ally of China, whose diplomats have often chosen to rally Pakistan in the past to keep India occupied and away from challenging China to the East. It has been a strategy that has largely worked. The energy prize for China however, lies in Iran, and its massive oil and gas fields. Getting to them, however, requires an Indian government that is good with China’s plans and that would also stand to benefit.

India & China – A New Demographic For Cooperation 
The Prime Ministers and Foreign Ministers of China, India and Russia have been meeting on a regular basis over the past two years. Most recently together in Moscow to commemorate the 70th anniversary of the end of World War II – an event not attended by Washington or London. The leaders also met in Beijing on 13th meeting of the Russia-India-China (RIC) Summit, bringing together the three superpowers. Summarizing the meeting, Chinese Foreign Minister Wang Yi stressed the need for ”cooperation” and the need to promote regional economic stability and develop trade ties.
Sino-Indian relations have in fact been slowly yet surely improving over the past two years, as has trade. Both cultural and trade development ties have deepened – both countries now share mutual tourism and cultural development offices, while direct flight connections have improved. As anyone who travels regularly from Shanghai to Mumbai or Beijing to Delhi will attest, those Airbus seats are packed full of both Chinese and Indian traders exploring opportunities in their respective countries. But underlying all of this resurgence in trade are demographic fundamentals.
Twenty-five years ago, coming out of the back end of the Cultural Revolution yet looking forward to a new dawn in China, the average age of a Chinese worker was 23. That worker age dividend continued – partly as a result of Chairman Mao’s earlier policy of allowing multiple offspring, which saw mothers being rewarded for having six or seven children, in stark comparison to the one-child policy that followed hard on its heels.
China’s young working-age population swelled well into the 1990’s, when finally population growth began to slow. From then on, China’s working population has aged and is now reducing in total size – having reached a high point of 750 million. The impact of this aging, but increasingly wealthy Chinese population is the creation of a consumer class. The average age of a Chinese worker today is 37. But the quandary is this – as Chinese wages increase, where is the One Party State going to obtain cheap mass-produced goods to keep its own population happy?

Young Indian Population
Step forward India. Today, the average age of an Indian worker is 23 – the same as China 25 years ago. The current Indian workforce is also increasing – standing at some 450 million at present; it will reach numbers comparable to China in 2025. This means that just as China’s workforce is aging and becoming more expensive, India’s is becoming available in larger and cheaper numbers. The workshop of the world, purely when measured in terms of population dynamics, is shifting, and India will take up much of the strain.
This has very specific implications for China. With a massive, yet demanding middle class, the CCP needs a reliable source of cheap labour to continue to allow Chinese nationals to enjoy mass-produced daily products. While some of this production will be met by China, and some from other ASEAN nations (most notably Indonesia), only India has the mass labour force available to provide that additional manufacturing capacity. Vietnam, by comparison, is not the “new China”. It is simply too small in terms of being able to satisfy an increasingly hungry Chinese desire for consumables.
The Chinese Government has been quick to realize this, and have toned down rhetoric against India and along disputed border lines. The Chinese have offered to invest billions in upgrading Indian infrastructure, to ensure that those cheaply made-in-India products can reach the Chinese domestic consumer market quickly and easily in the future. Crucially, this also includes proposals to upgrade India’s national rail network and to place high speed trains on popular routes. These include a proposed US$32 billion high speed line connecting Delhi and Chennai, and fit in with Indian Prime Minister Narendra Modi’s “diamond quadrilateral” project that aims to build a network of high-speed trains between cities including Delhi-Mumbai, Mumbai-Chennai, Chennai-Kolkata, Kolkata-Delhi and Mumbai-Kolkata. China’s National Railway Administration, China Railway Corp and China Railway Construction Corp are all believed to be involved in negotiations. China stock watchers would do well to note the performance of their shares whenever India plans are announced – the last media report on meetings between Chinese and India rail officials saw their share prices rise by more than nine per cent on the Shanghai Stock Exchange.
This is expected to be underlined by upgrading trade ties, which include the potential for a China-India Free Trade Agreement in some form. Early stage discussions have already begun concerning this.
The crux of the matter is that the Chinese recognize that they need India’s emerging young workers to satisfy their own demand. In the new emerging Asia dynamic, the China-India trade space is set to become one of the most explosive over the coming decade. Understanding this dynamic and reaching out into India for access to workers on a massive scale will impact upon the Chinese supply chain for decades to come.
Meanwhile, the Indian rail network can also connect eastwards via Kolkata through to the South-East Asian rail network and the Maritime Silk Road, a route I explore in more detail in that chapter.
Looking west to Pakistan, it may be some time before it is politically possible to improve and upgrade rail links between India and Pakistan. Economic necessity will dictate that one day they almost certainly will, and it is crucially in China’s energy interests that they do so. The results may yet reveal a softening of diplomatic relations between India and Pakistan. Their mutual cross-border cooperation is required in any event for the Iran-Pakistan-India and Turkmenistan-Afghanistan-Pakistan-India gas pipeline projects to go ahead, and both countries have recently stated, despite previous security issues, that they were ‘committed’ to these. The easiest way to lay pipelines is of course alongside existing rail track, as they are typically the shortest available routes and provide opportunities for pipe maintenance and the development of refining capabilities at suitable points.
A result of China’s need for inexpensive Indian products for its own population, coupled with the potential to route Iranian and Pakistani oil and gas through India bode well for developments in India especially, in addition to India-Pakistan relations.

Chris Devonshire-Ellis is the Chairman of Dezan Shira & Associates, a foreign direct investment tax law practice that assist foreign investors establish and operate their businesses throughout Asia, including China and India.

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