China’s President Xi to India Prime Minister Modi: “Here’s My Shopping List”

May 14, 2015 Posted by China Briefing Reading Time: 5 minutes

With Indian Prime Minister Modi visiting China from May 14 for a couple of days, much remains on the agenda between the two Asian giants. International media might concentrate on border disputes, although these really have only been a relatively recent development. China may now appear rather more flexible in attempting to settle these differences than has previously been the case. The reason for this has everything to do with China’s own demographic developments.

25 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 six or seven 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 the population growth began to slow finally. 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 the 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?

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.

CDE

The Chinese Government has been quick to realize this, and has toned down the 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.

In short, China now needs India more than ever before. An inability to provide a massive new Chinese middle class with a sustainable supply of cheap, yet reliable goods would cost the CCP in terms of domestic social unrest. Chinese manufacturing is now in danger of becoming too expensive for much of its own citizenship. Xi and Modi will almost certainly have development at the top of their lists and teams of analysts poring over documents to see where ancient trade routes can now be upgraded and brought back into the 21^st century. Chinese investment into Indian high-speed rail networks, as well as investments into port facilities are all likely to be announced. Yet while the infrastructure deals will dominate the headlines, the fundamental driver between the two nations is this: China needs India to export manufacturing back to China in order to satisfy Chinese future domestic demand. China’s President Xi can be expected to hand Indian Prime Minister Modi a shopping list.

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 about investing in India, please email india@dezshira.com or visit www.dezshira.com.

Chris can be followed on Twitter at @CDE_Asia.

Stay up to date with the latest business and investment trends in Asia by subscribing to our complimentary update service featuring news, commentary and regulatory insight.

Establishing Your Sourcing Platform in India
In this issue of India Briefing, we highlight the advantages India possesses as a sourcing option and explore the choices available to foreign companies seeking to create a sourcing presence here. In addition, we examine the relevant procurement, procedural and tax duty concerns involved in sourcing from India, and conclude by investigating the importance of supplier due diligence – a process that, if not conducted correctly, can often prove the undoing of a sourcing venture.

Trading with India
In this issue of India Briefing, we focus on the dynamics driving India as a global trading hub. Within the magazine, you will find tips for buying and selling in India from overseas, as well as how to set up a trading company in the country.

Using India’s Free Trade & Double Tax Agreements
In this issue of India Briefing magazine, we take a look at the bilateral and multilateral trade agreements that India currently has in place and highlight the deals that are still in negotiation. We analyze the country’s double tax agreements, and conclude by discussing how foreign businesses can establish a presence in Singapore to access both the Indian and ASEAN markets.