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Prime Minister Modi in China - 2015

Ambassador Prabhat P Shukla

Prime Minister Modi [R] with President Xi Jinping [L]

A clear-eyed assessment of the Prime Minister’s visit to China from 14 to 16 May must conclude that it has its pluses, no doubt, but there are also negatives that require attention. This will entail a detailed discussion on three major aspects of the visit: the border question, the economic engagement, and the broader strategy underlying the approaches of the two countries.

Before that, however, a few words would be in order to discuss some of the other aspects of the visit. The protocol, for instance, was remarkable. Probably not since Nehru has an Indian leader been given this level of attention and warmth – and publicity. This last being totally controlled, it is clear that all of this had official sanction. The words used by President Xi Jinping rang true, and surely reflected the good feelings he had after his warm reception in India last September.

However, there were sour notes too, and all of them came from The Global Times, which has consistently been sceptical and even hard-line on India. Accusing Modi of “little tricks” along the border, revealing that he had prevented the BJP President from meeting the Dalai Lama – a plus from the Chinese side, but embarrassing for the Prime Minister within the country - all these were meant to apply a corrective to the positive build-up to the visit. In similar vein, there was the display on Chinese TV of the map of India, without J&K and Arunachal.

This time there were no incidents along the border areas, as happened both when Li Keqiang came here in 2013, and when Xi came in 2014; from press accounts, this was because there was regular contact at high levels between the border commands and units on both sides in the run-up to the visit.

Based on just the above evidence, and there is more, it would not be too far-fetched to suggest that there is some policy debate on how to approach relations with India among the Chinese leaders. This itself is nothing to be surprised at: the former Secretary-General of the Ministry of External Affairs, RK Nehru, who had served as Ambassador to China in the 1950’s and continued to deal actively with them as Secretary-General in the early 1960’s, and was seen as too willing to conciliate, admitted in later years that they had all missed the internal differences within the Chinese leadership, and hence were unable to see the war coming in 1962.

Notwithstanding all the sniping, what is an undoubted gain from the visit is the good personal rapport that Mr Modi has achieved with both the top Chinese leaders. And, barring the unforeseen, they will have at least another four years in which to leverage these relations to get past the problems clouding the bilateral ties. In fact, it is probably the warm personal ties that have enabled Modi to speak bluntly and publicly on these issues, in a way no previous Indian leader has done. It is also a reflection of the developing trust at the leaders’ level that has enabled some forward movement on the operational matters that are reflected in the Joint Statement issued during the visit.

And yet, the frank words of Modi appear not to have registered. His call to China to take the strategic view, and to re-evaluate its policies on issues that are holding back ties quite clearly did not carry persuasion with his hosts. We have only Modi’s own word that the Chinese leaders were “responsive” – and even that does not tell us much. To the contrary, the leadership pair in China both had almost identical words to describe what they wanted from India – to steer the global situation in a more democratic and fair direction. This is treated in detail a bit later. Also worth a mention is that the recommendation favouring a strategic and long-term view emanated from Xi Jinping, during their meeting in Xian.

The Chinese were more forthcoming than in the past on India’s membership of international and regional organisations. Thus we have, for the first time, positive references to the Nuclear Suppliers’ Group [NSG]; to the Shanghai Cooperation Organisation [SCO]; and to the Asia-Pacific Economic Cooperation [APEC] organisation; and, of course, there was the standard formulation on the UN Security Council [UNSC] permanent membership.

But here, a comparison with the formulations used with the Pakistanis during the visit of President Xi in the month of April will sober up the more optimistic interpretations. Whereas the Chinese agreed to “actively support” Pakistani membership in SCO, they only welcomed India’s application. And for the UNSC, what they have agreed to over the years for India, is negatived by the terms used with the Pakistanis, where they call for any change to accommodate the concerns of all the members, and to be adopted only after obtaining “extensive support” among the member-states. In effect, they are endorsing the position of those member-states, like Pakistan, who oppose any new permanent members of UNSC.

There is also talk of an Asian Security Concept in the Joint Statement issued with Pakistan. The exact words in the document are, “[t]hey will actively advocate the Asian security concept featuring common, comprehensive, cooperative and sustainable security.” What this means is not clear, and this concept does not feature in the statements made by the Chinese leaders on their Asian or general foreign policy.

Anyhow, Pakistan figured in the pre-visit activity as well: the Indian side had lodged a demarche against Chinese activity in Pakistan-Occupied Kashmir, as most recently declared under the China-Pakistan Economic Corridor. Equally important, the US had also stated, on the eve of Modi’s visit, that China was violating its NSG commitments by continuing to supply nuclear reactors to Pakistan. Again, there is no indication that any of this was raised in the talks, either in Xian or Beijing.

Then there are the hoary old chestnuts that have been mentioned in our joint documents over the years, even though they have become devoid of any meaning owing to the actions of the two countries. One such is the commitment to respect the sensitivities and concerns of the other side. How much operational significance this has was on display during President Xi’s visit to Pakistan, just about a month before Modi arrived in Xian. The CPEC has already been mentioned; there are also references in the China-Pakistan Joint Statement to Pakistan’s record of promoting peace in the region, to its mainstreaming its non-proliferation activities. And just a few days ago, Prince Turki al-Feisal, the former Saudi intelligence head, announced that they were looking to Pakistan to supply nuclear weapons, to enable them to keep up with Iran.

What was new this time was a stand-alone statement on climate change. In a sense, this was a mirror-image, or response, to the US-China statement on the subject, issued in November 2014, when President Obama visited China for the APEC Summit. China has moved forward a bit, by declaring a peaking year, but little else; we have not even committed to a peaking year. And yet, both are committed to providing some commitments, not later than October, for the coming Paris Conference of Parties in the first half of December 2015. The principles are well-recognised, but it would appear that both countries have agreed to providing the so-called Intended National Development Contributions.

While on the subject of the Environment, the continuing discussion on trans-border rivers finds it usual place in the press-meet and the joint document. The bigger problem is the Chinese plan for diverting some of the rivers. This has not been reflected in any of the materials publicly available, and it would be understandable that China would resist any discussion, much less a commitment, on this score.

With the above as background, it is time to turn to the three main outcomes of the visit. The first concerns economic and business ties. It is clear that, at least since the September 2014 visit of President Xi, this component has become the most important aspect of our overall ties. In the words of the 2014 Joint Statement, “[t]he leaders agreed to make this developmental partnership a core component of the Strategic and Cooperative Partnership for Peace and Prosperity”.

Before going further into this, it would be useful to examine the state of the Chinese economy. This will help understand what they are trying to achieve in their economic strategy. The headline fact is that the economy is slowing down, and quite rapidly. This is coming after a spectacular burst of growth in the last three decades, and so some slowing down is natural – the base effect in reverse. But what is coming to the fore is the structural flaw in the development model – with its excessive dependence on Government-led investment, and export of the FDI-led manufacturing capacity. Since the days of Premier Zhu Rongji, the Chinese leaders have been talking about the need to change these fundamentals, and move to a greater reliance on domestic consumption, and services. Not much has changed despite policy pronouncements.

Investment, now financed by credit, is still the dominant factor in the growth of the economy. This, in turn, has led to a situation where the national debt is $ 28 trillion – close to 300% of the GDP. Its external debt is another $1.6 trillion. Together, these numbers dwarf the foreign currency reserves, and these themselves are also falling – from a peak of a bit over $4 trillion, they are now down to $3.7 trillion. In absolute terms, and in trend, these are not healthy numbers, and no one is more open about it than the Chinese leaders themselves.

The foreign reserves are also largely committed, and would not normally be liquidated in a hurry. Just over $1 trillion is committed to US Government bonds, plus a little more in GSE’s – Government-Sponsored Enterprises – Fannie Mae and Freddie Mac. Add the amounts committed to Africa, South America, Pakistan, the BRICS funds, the Asia Infrastructure Investment Bank, and the Silk Road Fund, and that gives some idea of the true picture of the Chinese economy. Not all of this is to be spent immediately, of course, but all this gives a better idea of the amounts available for future investments. In fact, the numbers for India are not very encouraging so far – each has invested some $300 million in the other country so far.

In the real economy, too, the situation is a source of concern to the Chinese leaders. Corporate profits are declining, and the Housing sector [accounting for some 20% of the economy – by contrast, the Housing sector was less than 10% of the US economy in 2008] is also stagnant or heading down. There have already been the early defaults on corporate loans, and there is the danger of more to come. The People’s Bank of China has cut interest rates thrice in the last six months, and dropped the Reserve Ratio Requirement for the banks.

The export sector is also showing signs of stagnation. Although the balance of trade is as high as ever, there are two noteworthy features of this. One is that turnover is declining, and the balance is positive only because imports are falling faster than exports. The second is that, but for the surplus with the US, China’s overall trade balance would be negative with the rest of the world. And given the shifting policies in the US, especially the prospect of higher interest rates, the Chinese want to reduce their dependence on the US.

This is one of the senses in which India becomes important. It is one of the few partners of China whose trade turnover is increasing [or at least not falling, depending on whose figures one looks at], in contrast, say, to Brazil or even Russia. And it is one of the few countries which is providing increasing surpluses to China. True, the scale is small, but the prospects are for even better days to come – one estimate is that the deficit India will face by FY 2018 could be $ 60 billion, if correctives are not put in place.

The idea of this brief survey of the Chinese economy is not just to make a sober assessment of the reality [because it is so lacking in most of our commentary], but also to suggest that the narrative of the past few years needs to change in line with the new reality. China is not the unstoppable juggernaut, which is predestined to overwhelm the rest of the world; no, it has problems, and difficult ones. On the plus side, it also has a leadership that is not trammelled by internal pulls and pressures, and is therefore able to take tough corrective measures. Only, these are not working so far. Therefore, we should calibrate our exposure in line with the assessment we make of the future course of events.

Two final points: firstly, none of the foregoing is to deny the fact that Chinese investments in India would be helpful to India. This is particularly applicable to infrastructure, especially those areas that are deemed not vulnerable from the security angle. Roads and Railways have been identified as good prospects, and it should be possible to identify some other areas too. Selected port development would be a good candidate for several reasons.

And second, the trade deficit that we have faced for years now should be addressed. This has been under discussion over close to a decade, but resolution remains elusive. In a sense, a bilateral deficit is not necessarily bad, and even China has run deficits with many of the raw material suppliers who powered their economy in the last decade. But where the deficit is due to access issues, as in Indian Pharmaceuticals, or agricultural products, through Non-Tariff Barriers – there we have a legitimate complaint.

The next basket covers the border question. First off, there are two inter-linked parts of the discussion here. The first is the border per se, the second is the Line of Actual Control [LAC]. The latter is easily disposed of; though the Indian side has raised this consistently, the Chinese have equally been firm on not answering our point. After 2006, that is, after the visit of President Hu Jintao, the Chinese have never even referred to the LAC in any joint document. This pattern was repeated both in September 2014 and this time as well. The Prime Minister raised the issue, but there was no reply, and no reference in the Joint Statement. It ought to be clear that they will not move on this issue. The background to this has been brought out in the public domain, and there is nothing more to add to that. The important point to note is that, in the absence of an agreed understanding of the LAC, all the agreements on managing the border areas since 1993 are meaningless.

As to the border, we have the 2005 Agreement on the political parameters and guiding principles, which set out the terms on which a settlement is to be reached. This Agreement has had a tangled history: shortly after it was finalised between Prime Minister Manmohan Singh and Premier Wen Jiabao, it was undermined by a statement by the Chinese Ambassador in Delhi who argued, on the eve of President Hu’s visit, that Arunachal Pradesh was Chinese – negating the agreement on not disturbing settled populations. Since then, the 2005 framework has been under continual challenge in different ways. Sometimes, it takes the form as mentioned, of questioning the status of Arunachal; at other times, the Chinese suggest that the India-China border is only 2000 km long, thus removing J&K altogether from the discussion; at still other times, it takes the form of maps which depict both J&K and Arunachal outside of India, as was done during Modi’s visit this time. On this last, there has been some defence of the Chinese action by arguing that they were doing no more than displaying their known claims. But that is like arguing that the Prime Minister could have met the Dalai Lama on the eve of his departure for China, since he does meet him from time to time anyway. No, it is perfectly possible to cover the news without displaying the map in full – the international TV channels have routinely done this with the India-Pakistan and the India-China maps.

However, this was also the first time that there was no reference to the 2005 Agreement. It has been part of the liturgy of the India-China diplomatic engagement that the 2005 Agreement figures in all the summit-level documents. The first sign of dilution came in 2013, when Prime Minister Manmohan Singh went to Beijing in October. The joint document on that visit merely encouraged the two Special Representatives to continue their efforts to explore a framework for a settlement. This was the second summit with the new Chinese leaders, and Premier Li was the principal interlocutor.

This position was reversed during the visit of President Xi – this time dealing with a new Indian Prime Minister – and the document of September 2014 contains not just the usual formulations, but in stronger form. It repeated the 2005 Agreement’s original wording, and said that a settlement “shall” be pursued as a strategic objective – going further than even the words used in the 2005 Agreement. For good measure, President Xi, speaking at the joint press-conference with Mr Modi added that this should be done “at an early date”, a phrase that was cut out by some media outlets in China, including Global Times. Moreover, some weeks later, addressing the Australian Parliament, President Xi said that China had settled its land borders with 12 of its 14 neighbours, and was hoping to settle the other two as well – meaning India and Bhutan.

The omission of a reference to the 2005 Agreement, therefore, requires closer examination. Sadly, that will not be possible without some sense of how the negotiations went, and also who the principal negotiators were. What is worth noting is that, once again, it was in Beijing, and Premier Li was the principal interlocutor in Beijing, since President Xi had finished his engagement in Xian. But at the moment, there is not enough evidence to go any further than to note this curious development. It will, however, bear watching, how future documents treat of this issue.

What makes this all the more noteworthy is that this is happening at a time when India is subtly changing its position on Tibet, to make it more palatable to China. On the Indian side, since 2010, it has stopped making reference to both One China and to Tibet as part of China. While the former remains unchanged, the latter did change in 2014. In the context of the alternative route to Kailash-Mansarovar, the Indian side has taken to thanking the Government of the Tibet Autonomous Region of the People’s Republic of China for opening this route. To China, this is much the more important desideratum, since we have little to contribute on the Taiwan issue anyway. There is no evident reason for this shift in the Indian position, and there seems to be no pay-back.

Finally, the big picture: from the Chinese side, the principal purpose behind the outreach to India is to keep us from joining in the US Rebalance, and the new formations taking shape in the Pacific, most importantly the Trans-Pacific Partnership, which is the economic counterpart of the Rebalance. This was most evident in the remarks Xi made to the PLA top echelons after he returned home from India last September. Among other matters, he admonished them to understand the strategic situation shaping up around China, in an indirect reference to China’s growing diplomatic isolation in the region. The message was repeated when Prime Minister Modi was in China: both Xi and Li urged the two countries to work together to promote a more just and reasonable international order. According to the People’s Daily, ‘Xi called on the two countries to look at their ties from a long-term perspective, strengthen coordination on global and regional affairs, and "steer the international order to develop in a fairer direction"’.

Premier Li expressed similar aims; according to the South China Morning Post, “We have the ability to make the global political and economic order move in a more just and balanced direction,” Li said. It does not require much mind-space to recognise that the target of such remarks is the US.

The Chinese leaders have done more than just talk about the strategic challenge they face. To counter the Rebalance, they have put forward the Maritime Silk Road; to the challenge of the Trans-Pacific Partnership, from which they are excluded by design, they have advanced the Asia-Pacific Free Trade Area, under the aegis of APEC, in which they are one of the more influential players, though the US and Japan are also members, and reluctant about the Chinese initiative [there is also the Regional Comprehensive Economic Partnership, led by ASEAN, from which the US is excluded]; and to the role of the IMF, the World Bank, and the Asian Development Bank, they have set up a counter-weight in the various Banks and Funds they have established. These are all admittedly on a smaller scale, but for now, the Chinese target areas are also smaller.

This is the dynamic in which the India-China summit took place. What is striking is that there is no word on any of these issues in the joint document, in stark contrast to the document issued after President Obama’s visit in January. President Xi did refer, in his meeting with Prime Minister Modi, to the similarities between our “Act East” and their Belt-and-Road proposal, but none of this finds reflection in the document. There is good reason for this: India appears in the Belt only in the context of the Bangladesh-China-India-Myanmar link, and this pre-dates the Belt-and-Road initiative. Elsewhere, India really does not figure, and the CPEC, apart from the sin of running through Indian territory under illegal occupation by Pakistan, also cuts across many of the schemes that would link India with Afghanistan and beyond. This is the strategic import of the Belt connections the Chinese are hoping to establish. Russia too is concerned about some of this, but is working to get itself into a position where it can play a blocking role where necessary – not with much success so far. As far as the Maritime aspect is concerned, it is equally clear that a more active Chinese presence in the Indian Ocean is contrary to our interests.

That is not all: the divergence of perception on maritime issues finds reflection in another way too. Over the years, especially since the new leaders took office in 2012-13, the common ground on the Asia-Pacific appears to be shrinking. In 2013, during the visit of Premier Li, there was detailed treatment of the subject, including a reference to the importance of the need for the “observance of the basic principles of international law”. From 2014 on, this has been whittled down, and this time it finds no place in the joint document.

This is where China looks to Indian policy choices with some sense of apprehension. Should India choose to throw in its lot with the US Rebalance and the TPP [and this does not mean an alliance], as it appeared to do during the visit of President Obama in January this year, that would be a serious negative for China. As it is, much of the western Pacific region – Japan, the Philippines, Vietnam, and several other ASEAN countries, Taiwan – are moving closer to the US in the face of the new-found Chinese aggressiveness. Prime Minister Modi appeared to give his hosts some sense of comfort in his speech at Tsinghua University when he declared that the age of alliances had passed, and added that, “Neither of us can be contained or become part of anyone’s plans”.

Another absentee, equally important, is Afghanistan. And here, too, the pattern is the same. After the Li visit in 2013, we mentioned the importance of a settlement on Afghanistan which should be Afghan-led and Afghan-owned, a clumsy phrase that is now common coin. This time, there is not a word on this, although Prime Minister Modi referred to it in his remarks at the joint press-conference with Premier Li. Here the import is obvious and unsettling. As the western draw-down of forces proceeds, it is Pakistan and China, working together, that are seeking the dominant role, and in bringing the Taliban to a power-sharing arrangement with the new Government in Kabul. The China-Pakistan document issued in April 2015 at the end of the visit of President Xi, spoke of their agreement to strengthen their cooperation for promoting peace in Afghanistan and the region. The message in the absence of any reference to this issue here is that India does not have any role to play in Afghanistan, in Chinese calculations.

Putting all this together, it is clear that there is a difference in the strategic assessments and approaches of the two countries. From the Belt-and-Road drive to the border issue, with Afghanistan, river diversion, illegal dealings with Pakistan, and the trade deficit in between, the differences are material ones, and will need to be fixed – and this has not happened so far despite decades of effort. Prime Minister Modi, to his credit, has been open about these, and has not hesitated to send out the message in public. There is some evidence to indicate that President Xi is willing to make the extra effort needed, but this will also depend on the handling of these issues from the Indian side. Firm correctness will yield positive results.

The style of this last document is also worth noting. For the first time, there is none of the usual talk about Panch Sheel, and the earlier documents, none of which have been implemented in practice. The tone is more brisk, and states, early in the document, that it is the historic imperative [that should properly be historical imperative] that the two countries enrich their bilateral ties – and then gets down to business. As mentioned, the only significant omission in shearing the deadwood of the past verbiage is the 2005 Agreement. Hopefully, it will be restored to its proper relevance in future documents.

May 2015,

New Delhi.

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