What China Wants From India – Manufacturing Capacity

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CDE Op-Ed Commentary

The Foreign Ministers of China, India and Russia met in Beijing on February 2 at the 13th meeting of the RIC Summit, bringing together the three superpowers. Summarizing the meeting, Chinese Foreign Minister Wang Yi stressed the need for ”cooperation” and the need to promote regional economic stability and develop trade ties. I have discussed the situation concerning Russia and its new turn to face East in my earlier article Russia-China Trade to Boom in 2015, however what of the new detente between China and its most populous neighbor, India?

Sino-Indian relations have in fact been slowly yet surely improving over the past two years, as has trade. Both cultural and trade development ties have deepened – both countries now share mutual tourism and cultural development offices, while direct flight connections have improved. As anyone who travels regularly from Shanghai to Mumbai or Beijing to Delhi will attest, those Airbus seats are packed full of both Chinese and Indian traders exploring opportunities in each others’ countries. But underlying all of this resurgence in trade are demographic fundamentals. 

Twenty-five years ago, coming out of the back end of the Cultural Revolution yet looking forward to a new dawn in China, the average age of a Chinese worker was 23. That worker age dividend continued – partly as a result of Chairman Mao’s earlier policy of allowing multiple offspring, which saw mothers being rewarded for having 6 or 7 children, in stark comparison to the one-child policy that followed hard on its heels.

China’s young working-age population swelled well into the 1990’s, when finally population growth began to slow. From then on, China’s working population has aged and is now reducing in total size – having reached a high point of 750 million. The impact of this aging, but increasingly wealthy Chinese population is the creation of a consumer class. The average age of a Chinese worker today is 37. But the quandary is this – as Chinese wages increase, where is the One Party State going to obtain cheap mass-produced goods to keep its own population happy?

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Step forward India. Today, the average age of an Indian worker is 23 – the same as China 25 years ago. The current Indian workforce is also increasing – standing at some 450 million at present, it will reach numbers comparable to China in 2025. This means that just as China’s workforce is aging and becoming more expensive, India’s is becoming available in larger and cheaper numbers. The workshop of the world, purely when measured in terms of population dynamics, is shifting, and India will take up much of the strain.

This has very specific implications for China. With a massive, yet demanding middle class, the Chinese Communist Party needs a reliable source of cheap labor to continue to allow Chinese nationals to enjoy mass-produced daily products. While some of this production will be met by China, and some from other ASEAN nations (most notably Indonesia), only India has the mass labor force available to provide that additional manufacturing capacity. Vietnam, by comparison, is not the “new China”. It is simply too small in terms of being able to satisfy an increasingly hungry Chinese desire for consumables.

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The Chinese Government have been quick to realize this, and have toned down rhetoric against India and along disputed border lines. The Chinese have offered to invest billions in upgrading Indian infrastructure, to ensure that those future cheaply made-in-India products can reach the Chinese domestic consumer market quickly and easily. This is expected to be underlined by upgrading trade ties, which include the potential for a China-India Free Trade Agreement in some form. Early stage discussions have already begun concerning this.

The crux of the matter is that the Chinese recognize that they need India’s emerging young workers to satisfy their own demand.  In the new emerging Asia dynamic, the China-India trade space is set to become one of the most explosive over the coming decade.  Understanding this dynamic and reaching out into India for access to workers on a massive scale will impact upon the Chinese supply chain for decades to come.

Chris Devonshire-Ellis
 is the Founding Partner of Dezan Shira & Associates – a specialist foreign direct investment practice providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam, in addition to alliances in Indonesia, Malaysia, Philippines and Thailand, as well as liaison offices in Italy, Germany and the United States. For further information, please email china@dezshira.com or visit www.dezshira.com.

Chris can be followed on Twitter at @CDE_Asia.

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