China-India Brief #175

Guest Column

China’s move towards industrial autonomy: Challenges and Opportunities for Southeast Asian countries and India 


By Jassie Hsi Cheng    

Image credit: World Bank/Li Wenyong

Although we are still waiting for the details of China’s 14th five-year plan to be made public in March 2021, the “dual circulation strategy” (DCS) is expected to be the core component. This two-pronged strategy focuses on reducing China’s dependence on imports and increasing self-sufficiency, particularly in relation to high-end manufacturing equipment and inputs (domestic circulation), while further opening up its economy to the rest of the world (international circulation). This strategy is the culmination of China’s aim to become more self-reliant and also develop new advantages in global cooperation and competition to increase its export market exposure. Even though China’s DCS is in itself not an inward-looking strategy, its ambitious aim of industrial and technological autonomy has triggered concern amongst trading partners which profit from exporting goods to Asia’s largest economy.

Challenges and opportunities

The trade war and technological conflict with the United States have pushed China to shift its global supply chain to Southeast Asia (SEA). In the first half of 2020, the Association of Southeast Asian Nations (ASEAN) replaced the European Union as China's largest trading partner. Semiconductors have been the main driving force of this burgeoning trade relationship, with shipments from ASEAN to China increasing by 24% and those going the other way increasing by 29% over the year. While the closer trade relationship certainly brings advantages for China and the countries of ASEAN, concerns remain that once China moves towards self-sufficiency, these economies will bear the brunt. French insurance-credit group Euler Hermes’ report appears to reinforce this worry as its findings show that Malaysia, Singapore, Thailand, the Philippines, Indonesia, and India are set to incur losses in the medium term as a result of China’s new approach. Malaysia’s medium-term loss is up to 6.5% of GDP, Singapore’s is up to 5.6%, Thailand’s is 5.1%, the Philippines’ is 2.9%, Indonesia’s 2.2 %, and India’s 0.8%.

Nonetheless, economically speaking, the region will still see profitable gains in the short and long terms. At present, China will need to learn from abroad as it is expected to prioritize the development of its semiconductor sector for computers and smartphones, next-generation telecoms, artificial intelligence, and other fields. Apart from learning from innovation-leading firms in Europe and North America, whose governments have begun to increase their scrutiny over foreign acquisitions, China may look to countries in the region with innovative potential, such as Indonesia, Thailand, and India. Some of these countries’ digital policies, such as Indonesia’s Making Indonesia 4.0 initiative and India’s Digital India programme, have provided a more friendly environment for China’s entry. Indeed, for these economies, China’s rising investment is not only helping to correct a lopsided trading relationship but is also meeting the demand for capital among local firms.

In addition, the DCS can be expected to drive the existing Belt and Road Initiative (BRI) in the long run. The DCS is an inevitable choice for deeper reform, higher level opening-up, and higher quality development, which the construction of the BRI embodies deeply as it also aims to promote the market circulation of commodities and factors internally, while achieving policy communication, facility connectivity, unimpeded trade, financing, and people-to-people bonds externally. Therefore, the DCS will represent both an opportunity and a driving force for the further development of the BRI. In other words, the higher the quality of China's internal cycle, the more value it will bring to the countries along the route. At present, under the BRI, China's largest investment partners are Singapore, Indonesia, Vietnam, Thailand, Laos, Malaysia and Cambodia, enabling China to have closer ties with this region in the future.

India’s efforts to reduce dependence on China

However, recent political incidents have prompted regional economies to rethink the national security implications of their over-reliance on China for trade. Take India, for example: Chinese dominance in the imports of telecom and electronics products has increased considerably over the past few years after the Indian government initiated the Digital India program in 2015. In 2019–20, more than 83% of imported mobile phones were of Chinese origin. Following the border clashes between Indian and Chinese troops in the Galwan Valley in Ladakh in June 2020, the Modi government issued a series of restrictive economic measures against China, which included enhancing the scrutiny of incoming Chinese investments in India and banning numerous Chinese apps, such as the TikTok and WeChat. Chinese companies have also been blocked from supplying equipment to Indian telecom service providers and participating in 5G telecom trials.

SEA 5G vendors’ shifts in preferences

There are also signs that SEA countries are beginning to diversify risks in key technologies. For example, Singapore's Singtel selected Ericsson (Sweden) as the vendor to build the company’s 5G infrastructure network, while the telecommunication providers StarHub and M1 chose Nokia (Finland) to supply core equipment. Although Chinese telecommunication providers such as Huawei and ZTE remain Singapore’s second-most preferred partners in building 5G infrastructure, this shift in the development trend has allowed other prominent European vendors to challenge Chinese dominance in Singapore's 5G ecosystem.

ASEAN's telecommunication providers Axiata Group (Malaysia) and Globe Telecom (Philippines) made similar choices. Axiata recently stated that the company would select two equipment suppliers to roll out its 5G network despite assuring Huawei the previous year that it would continue to work with them. Similarly, the Philippines’ Globe Group asserted that it would pursue a strategy of using non-Huawei equipment, opening the door for companies such as Ericsson and Nokia to challenge Huawei’s dominance.

There are many potential reasons for these shifts in preferences, but the aggressive crackdown on Chinese platforms, such as WeChat and TikTok, by the Trump administration, for instance, as well as the semiconductor war between the United States and China have had the most  significant impact. Business communities are especially keen to avoid potential cybersecurity risks associated with using Chinese hardware and the fallout from further US bans on Chinese technologies.

The path ahead

China's move towards industrial autonomy poses both challenges and opportunities for SEA countries and India, and these emerging economies will have to make carefully weighed choices that balance the costs and risks. However, history informs us that relying on a single country for critical products is never a wise strategy, and governments will need to more proactively safeguard the longer-term considerations of security and privacy as they open the door to new sources of investment. Businesses will also need to adjust their approach to navigate the uncertainties ahead. As stated above, the DCS is an inevitable choice for deeper reform, higher level opening-up, and higher quality development, meaning emerging economies might adopt similar policies at different stages. However, while opening up to the outside world, they must also strengthen their domestic industry and technological autonomy. In the end, improving the quality of domestic production and enhancing innovation will lead to multiple cycles of higher quality on an international level.

Jassie H. Cheng is a Research Associate at the Centre on Asia and Globalisation (CAG) at the Lee Kuan Yew School of Public Policy, National University of Singapore.

The views expressed in the article are solely those of the author(s) and do not necessarily reflect the position or policy of the Lee Kuan Yew School of Public Policy or the National University of Singapore.

News Reports

Bilateral relations

Jaishankar lists 8 principles to repair ties with China, stresses mutual respect
Hindustan Times, January 28

The minister’s virtual keynote address at the All India Conference of China Studies reiterated several concerns he has raised in recent months.

India, China suffer new casualties in border flare-up
Channel News Asia, January 25

Indian and Chinese troops clashed anew on their contested Himalayan border, resulting in injuries on both sides, officials said on Monday (January 25), highlighting the fraught state of relations between the giant nuclear-armed neighbours.

Latest China-India military talks agree to push for early disengagement as spring nears
Global Times, January 25

Despite the positivity shown by the meeting, with no significant breakthroughs achieved, Chinese experts expect continued, prolonged negotiations heading into spring, when warm weather could again promote military activities, and the face-off will likely continue.

China-India border dispute: village built in conflict zone part of Beijing’s poverty alleviation scheme, source says
South China Morning Post, January 24

Person close to Chinese military says development of about 100 houses was built within China’s territory as part of a nationwide poverty alleviation scheme. But Indian academic says Beijing’s house building schemes in disputed areas are just another example of its “aggressive expansionism”.

‘China actions reaction to border infra boost’
The Times of India, January 17

Indian External Affairs Minister S. Jaishankar stressed that the real problem with China was the rapid growth of India’s infrastructure efforts, adding that this had been slow until 2014.

India, Japan in talks with Russia to create trilateral & push Modi’s ‘Act Far East’ policy
The Print, January 28

The India-Russia-Japan trilateral is being explored to give fruition to New Delhi’s vision of making the Indo-Pacific strategic initiative ‘inclusive and not just against one country’

India sticking to S-400 deal with Russia despite threat of possible US sanctions
Hindustan Times, January 27

Russia is set to train the first group of Indian military specialists in operating the S-400 and the first batteries are expected by September.

Can India outshine China with Covid-19 vaccine diplomacy?
South China Morning Post, January 26

India is donating millions of AstraZeneca shots to countries including Bangladesh, Sri Lanka, Nepal and Mauritius. New Delhi says 92 nations including Cambodia, a close ally of Beijing, are interested in vaccines produced by the Serum Institute of India

China for resolving disputes through dialogue; don't bully weak: Xi Jinping
Business Standard, January 25

While he did not name any country, China's relationship with a few countries, mainly the US and India, has deteriorated badly in the recent past.

Eye on China, India to host Indian Ocean Region defence ministers’ conclave next month
The Print, January 22

As China expands maritime footprint in IOR, India is hoping to sell indigenously built defence equipment, such as fast patrol vessels & Akash missile.

China says Indian ban on apps violates WTO rules
Reuters, January 27

China said on Wednesday (January 27) that the Indian government’s decision to keep a ban on 59 Chinese apps was a violation of the World Trade Organization’s fair rules of business and would hurt Chinese firms.

China overtakes US as world’s leading destination for foreign direct investment
Livemint, January 25

China, long ranked No. 2, saw direct investments by foreign companies climb 4%, the United Nations Conference on Trade and Development said.

China's GDP tops 100 trillion yuan for the first time, economic strength embarks on a huge new step
Global Times, January 18

China's GDP grew 2.3 percent to 101.6 trillion yuan in 2020, according to data released by the National Bureau of Statistics. It also marked the first time that the country's economic volume stepped into a new era to exceeding 100 trillion yuan.

India’s trade with China falls in 2020, deficit at five-year low
The Hindu, January 16

India’s trade with China last year fell to the lowest since 2017, with the trade imbalance declining to a five-year low on the back of a slump in India’s imports from China.

India seventh most affected by climate change in 2019 globally: Report
Hindustan Times, January 26

Between 2000 and 2019, over 475,000 people lost their lives as a direct result of more than 11,000 extreme weather events globally and losses amounted to around US $2.56 trillion.

China’s Xi calls for unity in fighting virus, climate change
Associated Press, January 25

Countries must cooperate more closely in fighting the challenges of the pandemic and climate change and in supporting a sustainable global economic recovery, Chinese President Xi Jinping said Monday (January 25) in an address to the World Economic Forum.

China's CEIC, China Reform set up $1.55 billion new energy fund
Reuters, January 22

Upon launch, the fund is expected to generate about 50 billion yuan worth of financing in projects using wind, solar and hydrogen and energy storage, the State-owned Assets Supervision and Administration Commission said.

India, China may take lead in Asia’s Covid vaccination plans, says Moody’s Analytics
The Hindu, January 18

Terming India’s beginning of the vaccination programme a ‘crucial development’ for Asia, the firm said that the country’s advances on this front would soften the severity of the pandemic in Asia, especially as India is the second most-impacted country after the US.

Why Attempts to Build a New Anti-China Alliance Will Fail
Foreign Policy, January 27

By Kishore Mahbubani, Distinguished Fellow, National University of Singapore, Asia Research Institute

The big strategic game in Asia isn’t military but economic.

India must no longer wait for China to change its behaviour
Money Control, January 27

By Jabin T. Jacob, Associate Professor, Department of International Relations and Governance Studies, Shiv Nadar University, Uttar Pradesh, and Adjunct Research Fellow at the National Maritime Foundation, New Delhi.

A firm, punitive Indian military response towards China for the events of 2020 is necessary to delay, if not reduce, the possibility that the Chinese will try anything new again at the LAC.

India Can’t Say It Wants U.S. Help Against China
Foreign Policy, January 25

By Sushant Singh, Senior Fellow, Centre for Policy Research

The Sikkim clash and a declassified Indo-Pacific strategy raise tough questions for New Delhi.

Global Britain and India: A New Agenda for Cooperation
9Dashline, January 22

By Robert Clark, Defence Fellow, Henry Jackson Society, London; and Jyotsna Mehra, Pacific Forum Young Leader

As the United Kingdom (UK) charts a new and exciting relationship with global partners having left the European Union (EU), it was to New Delhi which British Prime Minister Boris Johnson was due to make his first official bilateral visit since being elected into office.

Biden’s China policy tweaks could bring fresh tensions for India and Russia
South China Morning Post, January 18

By C. Uday Bhaskar, Director of the Society for Policy Studies

A more collective US approach to dealing with China will force India and Russia to rebalance power relations, especially in a post-pandemic world requiring greater cooperation. India will increasingly be caught between the tug and pull, as closer ties with US fray relations with Russia.

Domestic Political Drivers and Chinese Diplomacy: Xinjiang and Counter-Terrorism in South Asia
Asian Perspective 44(4)(Fall 2020): 561-586

By Raj Verma, Associate Professor of International Relations and Foreign Policy, College of International Relations, Huaqiao University 

This article seeks to provide an answer to the question: in the new millennium, why did China continue to block India’s (and other countries’) attempts to designate Pakistani citizens as terrorists under UNSC 1267 committee rules? According to the extant literature, China’s actions are explained by India-China rivalry and India-Pakistan rivalry resulting in an “all-weather” strategic partnership between China and Pakistan against their mutual enemy India. However, the article argues that China’s actions are also explained by its concerns regarding terrorism/extremism/splittism in Xinjiang and the role of the East Turkestan Islamic Movement (ETIM)/ Turkestan Islamic Party (TIP) which threatens its national unity and territorial integrity. China is wary that the listing of Pakistani citizens as terrorists under the UNSC 1267 rules will lead to instability in Pakistan (and Afghanistan), which will provide a breeding ground for terrorists of all forms and colors including the Islamic State in Iraq and Syria (ISIS/IS/ Daesh). Daesh is a bane for China because it has links with ETIM/TIP and in recent years Uyghurs have also joined Daesh.