MUMBAI: If India doesn’t want Chinese money,’’ said the executive of a venture capital fund in Beijing, “then more money will go to another country.” The pragmatic, young Chinese man, experienced in doing business in India, already had alternative investment destinations in mind as we spoke online. New Delhi had changed its foreign direct investment (FDI) rules on 18 April, setting off alarms in Beijing.

“India’s not critical [to China’s investment plans],’’ he said. “Many investors will lose confidence and back off.’’

India has blocked the automatic route for investments from nations that share a land border to prevent “opportunistic takeovers/acquisitions” of vulnerable Indian companies as stock markets plunge during the coronavirus pandemic. The policy barrier against the dragon was raised soon after China’s central bank, the People’s Bank of China (PBC), raised its stake in housing finance major Housing Development Finance Corporation (HDFC) from 0.8% to 1.01%.

At the same time, several European nations are discussing or taking measures to block bids in struggling companies. France, Australia and Germany are among other nations that have taken recent measures to protect undervalued companies. No one has any doubt that all these measures have only one real target: China.

The Beijing executive, requesting anonymity because he isn’t authorized to speak to the media, said Indonesia, Thailand, Vietnam and the Philippines and parts of Africa could benefit from the diversion of Chinese tech funds from India.

China has been India’s fastest-growing source of FDI in the past five years. The Middle Kingdom has poured money into e-commerce, tech, retail, automotive and manufacturing sectors. No wonder the revised policy went viral on social media between the small network of Sino-Indian dealmakers— executives, lawyers, consultants and techies—who board flights nearly every month to the metropolises on both sides of the world’s two largest online marketplaces.

Some of them go on multimillion-dollar shopping sprees for Indian e-commerce start-ups. They then market these small firms with great promise to hopeful venture capitalists in Shanghai or Beijing who may, “in the blink of an eye”, as one Indian frequent flyer from Delhi put it, decide to buy it up themselves. On every trip, they expand their closely guarded corporate guanxi, or network of techies and technocrats, hone their Mandarin or Hindi vocabulary and assess the pulse of the two emerging giants separated by the world’s longest disputed border.

This ecosystem is now in a state of suspended animation.

THE GREAT GAME

A decade ago, the Sino-Indian investment corridor wasn’t busy. In 2011, Chinese investment in India was just $102 million and it was difficult to entice Chinese CEOs to attend promotional events for Indian businesses in Beijing. Current estimates of total Chinese FDI in India vary between $5 billion and $8 billion.

Led by Baidu, Alibaba and Tencent, Chinese tech investors have pumped $4 billion into Indian start-ups and funded 18 of 30 Indian unicorns (start-ups with billion-dollar valuations) in the last five years, according to a Gateway House report released in February. The think-tank’s report noted that with its 200 million subscribers, the popularity of Chinese video app TikTok surpassed that of YouTube in India; Alibaba, Tencent and ByteDance compete with Facebook, Amazon and Google; smartphone makers such as Xiaomi and Oppo, and not Samsung or Apple, dominate the nearly half-billion-sized and fast-growing market of Indian smartphone users.

“The Indian market now,’’ as a Chinese venture capitalist was quoted in China Daily in February, “is like what China was several years back when mobile-based access to the Internet boomed.” Here’s one indication: Chinese smartphone bestseller Xiaomi, which reportedly assembles three phones per second in India, announced plans in 2018 to invest ₹ 6,000 crore to ₹ 7,000 crore in 100 Indian start-ups in five years.

Indian start-ups themselves covet Chinese funding, because it comes with real-time expertise on how to tweak their business models on a daily basis. “[They] are fond of Chinese funds and expertise. An American investor can’t give them insights from a large vibrant market such as China,’’ said Santosh Pai, partner and head of the China desk at Link Legal India Law Services.

In China, the firm has clients from 40 cities, an indicator of the nationwide interest in the Indian economy. India’s embassy in China has also helped Indian start-ups secure Chinese funds.

WAIT AND WATCH

The Sino-Indian investment corridor stayed open for business and remained relatively insulated from periodic bilateral quarrels over Arunachal Pradesh, Jammu and Kashmir, Pakistan or the Indian Ocean. During the 73-day Sino-Indian military face-off at Doklam in 2017, investment evaluation proposals between firms were quietly continuing though anti-India travel advisories and anti-China boycott movements dominated the news.

“Chinese investments have a long-term goal to create industries of growth and development in India,’’ said Nazia Vasi, founder-CEO of consultancy Inchin Closer in Mumbai. “They have studied the economic landscape and invested with an aim to build scale.’’

Previously, central government approval was mandatory only for investments from Bangladesh and Pakistan. There were restrictions on acquisitions in critical infrastructure such as defence, telecom in border regions and certain pharmaceutical technologies. The Beijing executive quoted earlier said that India’s redirection of overall Chinese investment from the automatic to government route had instantly spread “concerns” and “uncertainty” in Chinese corporate circles. A sudden dip in confidence in India’s ease of doing business could potentially bring ongoing investment proposals to a temporary halt as venture capitalists go into a wait-and-watch mode.

Chinese fund managers are said to be worried about both existing tech investments in India and future fund-raising rounds. Loss-making Indian start-ups may need alternative sources to raise fresh funds quickly or face collapse. “A lot of investors are shocked,’’ said Pai. “The most panicky reactions are from those with investment transactions currently underway in India. One very big concern being heard is why China has been singled out.’’

OWNERSHIP UNKNOWN

Indian officials know that the Chinese FDI data available to them underestimates the true total. Large amounts of China-funded investment are routed to India from the US and global tax havens and financial gateways such as Hong Kong, Mauritius or Singapore.

Chinese investment ranks 18th-highest in India’s FDI inflows from countries, up from 28th in 2014 and 35th in 2011. The Indian Embassy in Beijing estimates $5.08 billion of cumulative Chinese investments in India until September 2019 comes with a rider that “these figures do not capture investment routed through third countries [such as] Singapore [and] Hong Kong, especially in sectors such as start-ups”. Official Chinese data pegs cumulative investments in India at about $8 billion.

Venture capitalists, the majority of whom operate from Hong Kong, are stunned, and are wondering whether India may withhold automatic approvals or make difficult procedural demands if the ultimate “beneficial owners” are suspected to be in mainland China. “An entity of a country, which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the government route,’’ according to the revised policy from the Department for Promotion of Industry and Internal Trade (DPIIT), which will implement it. This would also apply to transfer of ownership of any existing or future FDI in any entity in India, directly or indirectly.

Chinese venture capitalists, famous for their willingness to close a deal in two or three days, now face the prospect of waiting for clearances for an unknown period, at least until the rules are clarified in detail. In coming months, if they observe that government approvals are disbursed speedily, they will remain interested. Until they know for sure, India may see its fastest-growing FDI source slow down.

China’s media has been quick to call India’s FDI restrictions as a “bitter pill to swallow” for a nation aiming to become a hi-tech manufacturing powerhouse.

The great competition among state governments to attract Chinese factories to make smartphone components and consumer goods is going hi-tech. Also, India envisages a 30% rollout of electric vehicles, or EVs, in its car market by 2030—a goal that largely depends on investments and know-how coming from China, the world’s largest EV market.

Then there’s India’s car market, the world’s fourth-largest. It has fascinated CEOs of Chinese car companies for a decade and brought investment of over $500 million in the sector recently.

As a state-backed daily in Beijing warned on Wednesday: India is not “the only choice” for Chinese manufacturers. “If it’s now risky to go to India, they will certainly turn to Southeast Asia, which, by comparison, appears more willing to accept a shift of low-end manufacturing from China,’’ said an editorial in Global Times.

MUTUAL MISTRUST

The sweeping nature of the block on automatic investments has raised questions in corporate China whether numerous Chinese investors could face the level of strategic distrust that Chinese telecom majors such as Huawei and ZTE tackle in India, the US and Europe over their alleged state links.

India’s plans to move to a 5G network are already muddled. Indian telecom majors, reportedly wary of Chinese core technology, are reaching out to alternative companies in South Korea and Japan. “There’s a lot of unease in China about the implications,’’ said Sridhar Venkiteswaran, CEO of Avalon Consulting. “The FDI policy could have been more nuanced and limited to strategic sectors.’’

The barriers are the latest outcome of the general lack of mutual trust in Sino-Indian relations. After years of economic dialogue, New Delhi is increasingly impatient with Beijing’s refusal to lower its intangible market barriers to products and services from Indian IT, pharmaceutical and agriculture. China’s debt-trap diplomacy to build, own and control transport corridors on its Belt and Road Initiative (BRI)—which India has refused to join for reasons of sovereignty and lack of transparency—had already demonstrated Beijing’s appetite for strategic assets in 136 nations across Asia, Africa and Europe.

Chinese investments in start-ups have raised data security and privacy concerns. Two dozen Chinese tech companies and funds, led by tech giants such as Alibaba, ByteDance and Tencent, have funded 92 Indian start-ups, including unicorns such as Paytm, Byju’s, Oyo and Ola, according to Gateway House. “Alarming are the investments by China’s powerful BAT companies (Baidu, Alibaba and Tencent) in soft power projects in India—Artificial Intelligence, the Internet of Things and fintech,’’ its report on Chinese investments emphasised.

“That’s because the People’s Liberation Army of China and the Communist Party of China have a symbiotic relationship with China’s BAT, the makers of strategic domestic and overseas investments,” the report stressed. It underscored a need to protect Indian online data harvested by Chinese apps and browsers from Chinese ownership, and to prevent Chinese state-backed censorship and propaganda on China-funded apps in India.

The Communist Party of China has complained of discrimination in its first reaction to the revised FDI rules. But Beijing has also indicated it’s keeping the door open for engagement. Remember, Sino-Indian diplomacy has ensured that investment ties expanded in spite of bilateral political tensions. Days before the announcement, India arranged import of millions of Chinese masks and medical equipment to battle the pandemic. New Delhi also stayed aloof from the US-led blame game directed at Beijing for spreading a “Chinese virus”.