THE FUTURE OF CHINESE INVESTMENT IN INDIA

 The Fall of Chinese Investments in Indian Startups

Li Jian, a power broker in the Indo-Chinese tech relationship, moved to India in 2007, after graduating from Peking University, majoring in Indian Languages and Culture. He spent five years as head of public affairs at Huawei in Delhi and then founded an investment consulting service called Draphant. He became a major investor in Entrackr, an Indian media startup, in 2017.

 Following Chinese giant Alibaba's investments in Indian startups, Entrackr began organizing “guided knowledge exchange” tours to China. Between 2017 and 2019, it took over 200 people from India to China. Li adopted an Indian name Amit, after the Bollywood superstar Amitabh Bachchan, and acted as liaison partner for Chinese delegations visiting India. Gurugram, where Li's company is based, began developing a Chinese startup subculture.

 When Li returned in January 2020 to celebrate Chinese New Year with his family in Guli, China, he was sure that his startup Draphant was poised to capitalize on Chinese investments in India. What happened next came as a shock. In January, the COVID hit India, and in June, a border clash worsened the bilateral relationship between China and India. The Indian government declared that all Chinese investments in Indian companies would have to be reviewed by the state before they could proceed. It was followed by a three-phase ban of over 250 Chinese-owned apps, wiping out most of the Chinese internet market that had blossomed. Entrackr was compelled to turn to external funding sources, including Paytm, raising USD 500,000 in February 2021, to keep it afloat.

In January 2020, Indian food-delivery startup Zomato had raised USD 150 million from Alibaba's fintech arm, Ant Financial, but was unable to access USD 100 million of the funds. Koo, the nationalistic alternative to Twitter, divested the 9% stake that Chinese Shunwei Capital held in the firm. More than USD 2 billion worth of investment proposals from China is currently held up in India’s slow approval process.

Some circumvented the FDI restrictions using debt instruments. Tencent invested USD 40 million in music streaming platform Gaana and another USD 224 million in ShareChat. The Gaana investment came via Tencent’s European entity, using convertible debentures. Li Jian helped companies find financial instruments, like external commercial borrowings that let Chinese investors move money into China. But, the void in the capital in Indian startups has now been filled by U.S. firms like Tiger Global, which has invested USD 1.74 billion, in 15 deals in the first half of 2021.  

Chinese dawn in Indian startups

Till the beginning of 2020, Chinese money was flooding into India’s startup ecosystem. In 2018, Chinese VCs invested USD 5.9 billion into India. E-commerce giant Alibaba was an early investor in Paytm, Zomato, Bigbasket, and Snapdeal, while its rival, Tencent, backed Flipkart, Byju’s, Ola, and Swiggy.

But the sudden turn in 2020 meant that the Chinese players who participated in the creation of India’s unicorns cannot participate in a new funding boom — USD 7.2 billion was raised in the quarter ended June 2021 alone. 

In the early 2000s, Chinese companies like Alibaba, Tencent, Baidu, and Xiaomi had focused on their USD 1.3 billion-strong domestic market. In 2014, when Alibaba was listed in the U.S., its USD 231 billion valuation, made it the largest IPO in history.

Flush with funds, for these Chinese giants, India’s growing startup ecosystem seemed fit for strategic investment. In 2015, Alibaba paid USD 680 million for a 40% stake in Paytm. Later that year, they were part of a USD 500 million investment in Snapdeal. The Alibaba group has been investing in the supermarket chain, Bigbasket from 2017 onwards. While the investment in 2017 remains undisclosed, in 2018 it was USD 146 million, in 2019 and 2020, USD 50 million each.

 Tencent joined in 2016, leading a USD 175 million round in Hike Messenger, India's answer to Whatsapp. Hike gave up on messaging in January 2021. In 2019, Tencent invested USD 100 million in India’s first gaming app to enter the unicorn club, Dream11.

 Xiaomi made its first investment in an Indian company by pouring USD 25-million in Hungama Digital Media Entertainment. It also invested in Marsplay, Oye Rickshaw and ZestMoney.

Paytm’s valuation almost tripled to USD 8.3 billion in two years and its success attracted smaller players and venture capitalists, like Morningside and Shunwei Capital, a sister concern of Xiaomi. In 2017, Shunwei Capital invested in ShareChat and the next year, it led to a USD 50 million investment in Meesho. It has since invested over USD 100 million in Indian startups, including in podcasting company KuKu FM and Indian alternative to Whatsapp, Koo.

Shunwei was joined in the Indian market by CDH Investments, Qiming Ventures, Orchid Asia Group, Legend Capital, Steadview Capital, and China insurer Ping An's fund, which were mostly looking to back proven business models. One such target was Cashify, which resembled AiHuiShou, a Chinese platform on which users bid for second-hand electronics. Three Chinese funds — CDH Investments, Morningside, and Shunwei Capital — were invested in Cashify in 2018.

The last Chinese investment in an Indian startup was in April 2020, by Legend Capital in the interactive online tutoring unicorn Vedantu, with a contribution of USD 10 million.

There has been a 12x growth of Chinese investments in Indian startups from 2016 to 2019. A report titled “Chinese Investments in India” by Gateway House estimates that the total value of Chinese investments in Indian startups during 2015 - 2020 is approximately USD 4 billion. 18 Indian unicorns including Flipkart, Dream11, Delhivery and Rivigo are backed by Chinese investments.

The economic rationale behind these investments is many. First, with the saturation in the Chinese domestic market, India is viewed as one of the last emerging markets with untapped potential. Moreover, Indian markets suffer from a lack of capital due to which investments are welcome in the system. Third, there is immense creativity and ideas that are offered by the Indian engineering institutes and the skills of young techies. And finally, these investments in India give China a competitive edge against the U.S.

China takes a back seat

 Over the last two decades, India has received a cumulative USD 456.91 billion in FDI, with over 72% of it coming from five countries: the US, Singapore, Japan, Netherlands and Mauritius— China is not one. 

The proportion of China’s FDI in India during the same period constituted a mere USD 2.34 billion or 0.51% of the total inflows. However, post-2014, Chinese investments shot up considerably across startups. But the preference for Chinese investors has gone down significantly from 29% in 2020 to 3% in 2021. The change in FDI regulations since 2020, resulted in funding from Chinese investors in India falling from USD 3.5 billion in 2019 to USD 1.05 billion in 2020.

 

After almost a nine-month freeze, the Indian government started clearing the Chinese FDI proposals in early 2021, for the ‘smaller cases’, while the larger proposals are to be dealt with later after a careful analysis. The Chinese gap may be filled by investments from other markets such as the US, UK, and Japan.

Thus, India startup funds topped China in July 2021, the first time since 2013, after China stepped up a regulatory clampdown on its tech companies. Indian startups raised nearly USD 8 billion in July, while funding to Chinese firms dropped to about USD 5 billion, according to a Bloomberg report. Indian startups have raised a record USD 17 billion during January-June 2021, a surge from about USD 12 billion raised in full-year 2020 and USD 14 billion in 2013.

 Though Chinese startups raised about USD 49 billion in the first six months of 2021, funding has slowed since the December quarter of 2020. From a peak of USD 27.7 billion raised in Q4 2020, Chinese startup funding dropped by 18% t0 USD 22.8 billion in Q2 of 2021, while India funding rose by 62% t0 USD 6.3 billion from USD 3.9 billion in the same period. India has seen 36 new unicorns in 2021, while China has added about 15. India raised nearly USD 20.76 billion across 583 deals as of August 20.

 And it is too early to paint a negative picture vis-à-vis China. India and China seem set to hit a record-high trade of USD 100 billion, having already touched USD 90.37 billion in the first nine months of 2021 — a 49.3% year-on-year rise, according to the latest data from China’s General Administration of Customs (GACC). China was India’s top trading partner in the April-July period, followed by the US, UAE, Saudi Arabia and Singapore. Exports and imports between India and China grew at over 65% in the January-June period this year. The push by the Modi government for self-reliance couldn’t put a pin in the ballooning trade.

 

 © Ramachandran 

CHINA AND A LESSON FROM GANDHI

A Lesson From the Trusteeship Theory

In his paper, Harijan, Gandhi enumerated his Doctrine of Trusteeship on February 23, 1947, when Mao fought for his people in neighbouring China. 

 

Gandhi was an economist of the masses. The fluid international conditions fraught with ideological tensions in the economic domain demanded a fresh approach to economic philosophy. The core of Gandhian economic thought is the protection of the dignity of the human person and not mere material prosperity. He aimed to develop, uplift, and enrich human life rather than a higher standard of living with scant respect for human and social values. Gandhi's idea of trusteeship arose from his faith in the law of non-possession. The world's bounties are for the whole, not for any individual. When an individual has more than his respective portion, he becomes a trustee for the people.

 The trusteeship formula of Gandhi reads as follows: 

 

1. Trusteeship provides a means of transforming the present capitalist order of society into an egalitarian one. It gives no quarter to capitalism but gives the current owning class a chance to reform itself. He felt that human nature is never beyond redemption.

 

2. It does not recognize any right of private ownership of property except that society may permit it for its welfare.

 

3. It does not exclude legislation of the ownership and use of wealth.

 

4. Thus, under state-regulated trusteeship, an individual will not be free to hold or use his wealth for selfish satisfaction in disregard to the interests of society.

 

5. It proposed a decent minimum living wage and a limit on the maximum income allowed to any person in society. The difference between such minimum and top incomes should be reasonable and equitable and variable from time to time, so much so that the tenancy would be towards obliterating the difference.

 

6. Social necessity determines the character of production and not by personal greed.

 

Gandhi wanted Zamindars/ Kulaks/ landlords to act as trustees of their lands and use them by tenants. This idea was based mainly on India being an agricultural country where more than 80 per cent of the population lives in villages. 

 

Gandhi's doctrine of trusteeship is a social and economic philosophy aiming to bring justice to society. It provides a means by which the wealthy people would be the trustees of the trust that looked after the welfare of the people in general. Gandhi believed that the rich people could be persuaded to part with their wealth to help the poor, and he held that labour is superior to capital.

 

He formulated the trusteeship theory after the Ahmedabad textile mill workers dilemma. He became more aware of the prevailing gap of interest between the owners and workers of the industries. Gandhi introduced the concept of trusteeship based on class cooperation in society. He believed that even the rich people are, after all, human beings, and as such, they also have an element of essential goodness that everyman necessarily possesses. The capitalist should be aroused by that element and won over by love. And persuade them to believe that they should utilize the wealth in their possession \for the good of the poor. The rich should realize that the capital in their hands is the fruit of the labour of poor men. This realization would make them perceive that the welfare of society lies in using money and resources for the good of others and not for one's comforts. It is a doctrine of moral responsibility and a practice of Non- possession.

 

Italian philosopher Thomas Aquinas said that bringing justice is the responsibility of the state and individuals by being empathetic, compassionate, and selfless. Gandhi's doctrine is akin to this idea. It is the responsibility of rich people to uphold the philosophy of trusteeship by being charitable. Trusteeship assumes great relevance nationally and globally, keeping in mind the growing inequality and poverty. 

 

Half of the world owned by 62

 

An Oxfam report reveals that one per cent of people in the world possess 50 per cent of the world's total wealth, and just 62 people own the same as half of the world. The wealth of the poorest half has fallen by a trillion dollars since 2010, a drop of 38 per cent. Despite the global population increasing by around 400 million people during that period, it has occurred. Meanwhile, the richest 62 has increased by more than half a trillion dollars to $1.76 trillion. The report also shows how inequality disproportionately affects women – of the current '62' richest, 53 are men, and just nine are women. 

 

A total of $7.6 trillion of individual wealth sits offshore. If the rich paid tax on this income, an extra $190 billion would be available to governments every year. As much as 30 per cent of all African financial wealth is estimated to be offshore, costing an estimated $14 billion in lost tax revenues every year. It is enough money to pay for healthcare for mothers and children in Africa to save 4 million children's lives a year and employ enough teachers to get every African child into school. The number of people living in extreme poverty halved between 1990 and 2010. The annual income of the poorest rose only less than $3 in the past quarter of a century. Had inequality within countries not grown between 1990 and 2010, an extra 200 million people would have escaped poverty.

 

In India, one per cent of people own 58 per cent of total wealth. 

 

The Gandhian principle of trusteeship is closely related to the social responsibility of business. According to Gandhi, all business firms must work as a trust. Business people should change their attitude. They have no moral right to accumulate unlimited wealth while most fellow citizens live in poverty and misery. 

 

Few richest men in the world, like Bill Gates, Warren Buffet, and Jeff Bezos, have rarely shown the principle of trusteeship. Even during COVID, the corporates were trying to make money by developing vaccines and reducing overheads by implementing the system of working from home. 

 

The crackdown in China

 

Several leading Chinese internet companies, including Tencent, Alibaba, Didi Chuxing, and eSuning, were fined 500,000 yuan ($77,345) for breaching the anti-monopoly laws in July 2021, as China stepped up its crackdown campaign against monopolistic behaviours that threaten to stifle market vitality. Alibaba paid a record $2.8 billion fine in April. Market regulators determined these companies to have breached the "concentrations of undertakings" provision under the anti-monopoly law in a total of 22 equity investment and joint venture deals, the State Administration for Market Regulation (SAMR) had said in a statement. 

 

Multiple subsidiaries of Didi - Xiaoju Kuaizhi Inc - were among the penalized parties, days after Didi was removed from Chinese app stores by order of China's cyberspace regulator over cybersecurity issues. The probes of the 22 cases, which involved fields such as new retail, e-commerce, logistics, fintech, ride-hailing, and charging piles in the new-energy vehicle industry, started in March and April 2021. Xiaoju Kuaizhi Inc and BAIC Mobility Co, a subsidiary of Beijing Automotive Industry Holding Co (BAIC Group), failed to report to the SAMR about their joint venture before obtaining a business license. It violated Article 21 of the Anti-Monopoly Law and constituted an illegal concentration of business operators. E-commerce company Suning and a subsidiary controlled by China's largest online food delivery platform Meituan were also on the receiving end of fines. Many of the fined companies are there on overseas stock markets.

 

China has been ramping up crackdowns on its digital platform companies, as the digital economy accounts for a growing percentage of the world's second-largest economy and poses some serious risks. The government is seeking to regulate the market, curb the disorderly expansion of capital and inject vitality into the vital sector, which already accounted for 36.2 per cent of the nation's GDP as of 2019. The closure of 109 monopoly cases by SAMR marked the country's antitrust push was marked by 2020, with penalties totalling 450 million yuan and intensified anti-monopoly crackdowns on internet platform companies. Last year, the SAMR told 34 platforms - including Tencent, Alibaba, Baidu, and Meituan - to thoroughly rectify their monopolistic behaviour, and tax-related irregularities or violations, within one month.

 

The crackdown was waiting to happen because the corporates were pretending to be bigger than the state and the people, shirking off their social responsibility. They could have taken a leaf out of Gandhi or Marx.

© Ramachandran