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China, India Will Compete; They'll Also Team Up

China, India Will Compete; They'll Also Team Up

Author: Andy Mukherjee
Publication: Bloomberg
Date: April 8, 2004
URL: http://quote.bloomberg.com/apps/news?pid=10000039&refer=columnist_mukherjee&sid=ai.q7dF174AQ

To argue that the economic competition between China and India is like a boxing match that will ultimately produce only one winner, is to present a scenario that's too simplistic and improbable.

Analysts who do that are ignoring an important trend: the growing interdependence between the two countries.

Superficially, China and India appear to be no more than natural competitors. Both are billion-people economies, with pockets of urban prosperity coexisting with large-scale rural poverty. Both are leveraging their bargain-basement wages and their growing consuming classes to win investments by global companies.

For now, China is ahead in the game. It started opening to global trade and investment in 1978, a good 13 years before India, and now has an economy that's almost thrice India's size. It's only recently that India's economy, which expanded 10.4 percent in three months to December, has begun to catch up with the breathtaking pace of growth in the Chinese economy.

From investors' point of view, the main difference between the two economic systems is that India's democracy can often prove to be more socialistic than communist China's -- you can ask anyone who has tried to set up a factory in India. The other point of departure is that China is more successful in manufacturing, while India's edge lies in computer software and other services.

Moreover, while many of India's world-class companies are indigenous, foreigners own most of China's first-rate businesses.

China's Priority

Although there are differences between the two nations, there is growing evidence that the future prosperity of China and India may be interlinked. Sure, the two rising superpowers will compete for investment dollars. At the same time, they'll also collaborate and benefit from each other's good fortune.

China's priority is to develop its western region, which shares a border with India. While eastern Chinese port cities like Shanghai and Guangzhou have become prosperous over the past two decades by supplying the world everything from auto parts to television sets and toys, landlocked western China is under- industrialized because it doesn't have access to global markets.

Per capita income of the 280 million people living in western China is half the national average, according to the Web site www.China.org.cn, which describes the region as ``barren, remote, poor, large, valuable, and beautiful.''

Opportunities for Both

Beijing recognizes that economic growth in neighboring India can create huge demand for consumer goods to be supplied from western China. A beginning has already been made. During Indian Prime Minister Atal Bihari Vajpayee's visit to Beijing in June 2003, the two countries agreed to open, after 42 years, Nathu-la pass, the only all-weather overland trade route joining China and India through the Himalayas at 14,500 feet above sea level.

Opportunities will abound on the Indian side as well. China National Foodstuff Industry Association estimates that by 2005, western China's expenditure on packaged food will be 250 billion yuan ($30 billion). Some of that demand could be met by India.

None of this will happen overnight. The pass is narrow and slippery, and vulnerable to landslides in the rainy season. It will require major investments before trucks can ply on that road. Those improvements may just be matter of time, as after decades of mutual suspicion and hostility, the two sides seem to be finally getting serious about bilateral trade. The value of the merchandise that the two countries trade with each other rose to $7.6 billion last year, from just $291 million in 1991.

The Past Is Past

The current enthusiasm to do business with each other signifies a break from the past for both countries.

Nathu-la, which is the shortest link between the two countries, was closed after China and India fought a brief and bitter war over their border disputes in 1962. After the war, China moved closer to India's archrival Pakistan, supplying it with military hardware. In 1998, Indian Defense Minister George Fernandes labeled China as India's ``potential threat number one.''

China wants to put the 1962 war behind it, just as it wants to forget the entire messy period of Mao Zedong's ``Cultural Revolution'' that started in 1966, soon after the war with India.

By contrast, many on the Indian side still smart under the humiliating military defeat ``just like a younger brother who got hit on the head,'' says Girija Pande, regional director for Asia- Pacific at Tata Consultancy Services Ltd.

It's business executives like Pande who are helping change those attitudes. Tata Consultancy, the biggest Indian software company, set up a code-writing center in Hangzhou in China in 2002. It has 150 engineers working there; as many as 140 of them are Chinese nationals. Infosys Technologies Ltd., India's No. 2 software exporter, recently opened a subsidiary in Shanghai, and said it will invest $5 million in the unit, which will employ 200 code writers.

A Ferrari

Huawei Technologies Co., China's largest maker of phone equipment, last year opened an 80,000 square-foot research center in Bangalore, India. Qingdao Haier Co., China's biggest appliances maker, has started selling its refrigerators, television sets, washing machines and other products in India. Haier plans to eventually manufacture in India to supply neighboring countries.

If China and India can bury the hatchet, their claim for economic supremacy could indeed be a joint effort.

China and India aren't in a boxing match that only one of them can win. Investors should see them as Formula One racecars from the same team. And from the way the two economies are revving up, the team sure looks like a Ferrari.

Andy Mukherjee is a columnist for Bloomberg News. The opinions expressed are his own.

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