“Exciting” India-China economic and trade relations

I have earlier blogged about trade relations between India and China. Mr. Mao Siwei, Consul General of China in Kolkata made some interesting remarks recently at an Industry chamber meeting. Here is what he said about India-China trade:

Ladies and gentlemen, after talking so long about world meltdown, let’s talk about something exciting. That is about China-India economic relations. For the first time, China has become India’s largest trading partner and the bilateral trade reached 51.8 billion US dollars in the calendar year 2008. Ten years ago, the figure of China-India trade in 1998 was only 1.9 billion US dollars. This is a nearly 30-fold increase in just ten years. And also the first time in history, India has become the biggest overseas market for Chinese companies undertaking contract projects. Last year, Chinese companies were awarded contracts worth 12.9 billion US dollars for various construction projects in India.

We are in the era of globalization where economic ties constitute the basis of overall relations between countries. It is very much true for China and India.

China and India are two of the largest economies and both have established their comprehensive industry systems. But at the same time, the economic strengths of our two countries are very much complementary to each other.

India is strong in knowledge-based industries, especially in IT and pharmaceuticals. So many Indian companies in these sectors have established their offices, laboratories and factories in China and their business is doing quite well.

China is strong in manufacturing and infrastructure and many Chinese companies are doing business in these fields in India.

Mr Siwei does not give any figures for Indian businesses operational within China. These would have been interesting too.

Here is what he said about energy security and India-China cooperation in the power sector:

Recently I have found a phenomenon in economic cooperation between our two countries, which has been emerging in the power sector. Here I would like to talk a little bit more about it.

Indian economic growth has been on fast track these years and the issue of shortage of electricity needs to be addressed in a very urgent manner. The Government of India has set up an ambitious target with a time frame of ten years. That is: by year 2012, all electricity demand will be fully met; per capita availability of electricity will be increased to over 1000 units; and accordingly new electricity generation capacity of 100,000 MW will be added during the period from 2002 to 2012.

Now I am sure that this target will be achieved on time or even before the due date. One of the reasons is that the Electricity Act 2003 of India has opened the door for international competition and China’s major power equipment producers and power plant builders have been quite active in the Indian market since then. Now Chinese companies have obtained many contracts for power equipment and EPC power projects. According to an incomplete statistics, over 30,000 MW of equipment will be supplied by Chinese companies in the coming few years, which accounts for over 30 per cent of the capacity addition target of 100,000 MW.

This is really a new phenomenon in the history of China-India economic relations and is a win-win situation.

For China, after 20 years’ hard efforts, its capacity of producing power equipment and building power plants is now much larger than the domestic demand. At the end of last year, the total installed power capacity in China was almost 800,000 MW, which was 5.4 times that of India at the same time. And last year also, 133,000 MW of equipment was manufactured in China, which was nearly as much as the total installed power capacity of 147,000 in India at the beginning of this year. So to maintain and develop the capabilities of power equipment manufacturing and power plants construction, Chinese power industry has to go abroad. They have found many large markets in the world, but the Indian market is one of the largest.

For India, to achieve the target of addition capacity of 100,000 MW by 2012, international cooperation is very much needed and China is a natural choice for many reasons: one, nowadays in the world, only China and India are two large economies which still rely heavily on coal-fired power generation, and in this field major Chinese companies have the latest know-how; two, Chinese equipment is reasonably cheap while its quality is comparably good; and three, because of their large capacity and rich experiences, Chinese companies can deliver goods on time and do the job faster.

Power plant is a strategic project in terms of its long life of about 30 years and its significance to millions of people. So it is understandable that the Indian side has to attach great importance to the quality issue. Recently a few Indian newspapers reported some problems of power projects constructed by Chinese companies and suspected the quality of Chinese equipments. According to my knowledge, the reported problems are teething problems and all the power equipment producers and power plant builders, no matter they are Indians or foreigners, might have the same problems. But it may not be fair that just because you are newcomers, your problems are easily the news to the media. As I know, most of the contracts the Chinese companies obtained have been awarded by Indian companies in the private sector. Definitely, it is not an easy decision for private business people to make to invest billions of Rupees in a power plant. They have to do their homework seriously and have to make their research all over the world. Finally they have been convinced that to choose Chinese equipment is in their best interests. We don’t need to doubt about their wisdom.

Recently our Indian friends have been talking very much about energy security. Now I have a feeling that in a short term, or in next ten to twenty years, if there is one foreign country which will contribute the most to the development of India’s power sector, that country must be China.

Here is an interesting Business Standard story about little Chinatowns coming up in the Indian countryside for Chinese workers building power plants in India. I have highlighted some interesting bits.

Little ‘Chinatowns’ are springing up at different locations in India as more and more Chinese companies bag contracts to build steel and power plants in the country.

“We have executed, for a major secondary steel company, a township for 2,000-odd Chinese workers at a location in Jharkhand, where they would be erecting, commissioning and operating a combined steel and power unit,” the chairman of a leading architecture and civil engineering firm told Business Standard.

“The quarters are quite spartan, with basic sleeping and recreation rooms, and shower ranges and attached toilet units, but with the requisite engineering to permit a large number of people to use the facilities simultaneously,” added the architect.

He said it was the largest such township to be built in the country and the standards and designs were different and much closer to the Western designs than similar complexes built for Indian workers at offsite project locations.

While the steel company refused to be identified, or to name the Chinese party (saying it was commercially sensitive information), the chief financial officer (CFO) of the company confirmed that the Jharkhand unit would be using Chinese technology and rely on a core manpower team from that country to operate at the levels of efficiency promised by the Chinese equipment supplier. “We understand that the Chinese government has unofficially told their equipment suppliers that if they desired to draw support from government agencies like their export financing institutions, they would do well to use Chinese workers at offsite locations instead of using local workers as it would support jobs and families in their country,” said the CFO.

He said he estimated 3,500 Chinese workers were in East India alone, and another couple of thousand more in other locations in the country. Such residential zones for Chinese workers were coming up at three locations in West Bengal, with as many as five plants being set up using technology from the communist nation.

When contacted, two Chinese supervisors with English-speaking skills serving at projects in Bengal, said while they had problems with the quality and speed of work done by Indian workers, they found the working and living conditions comparable to the Chinese facilities.

“We find many of the foods we prefer and have collectively hired domestic staff from our country, while 60-70 of us have moved our families to Kolkata as well,” said Jin Bao, one of the two engineers. Chinese contractors acquired a formidable reputation after the EPC firm, Dongfang Electric Corporation, won at Rs 2,750 crore, the contract for the West Bengal Power Development Corporation’s 2×300 Mw Sagardighi coal-based power plant in the Murshidabad district.

The first Sagardighi unit began power generation in end-2008 with power load factor of 80-90 per cent, while the second unit’s synchronisation is due.

When contacted, sources in the Chinese consulate in Kolkata refused to comment.

Foreign teams working at projects is not new — Russians worked to build the Bokaro Steel Plant and some ordnance factories, the Germans set up the Bhilai and Rourkela steel plants and the British built the Durgapur steel plant in the past.

However, these expatriates usually lived in mixed areas in bungalows comparable to those provided to Indian officers, and not usually in separate enclaves. Besides, they were usually highly skilled supervisory staff and not expatriate blue-collar workers completely manning project erection responsibilities.

The Business Standard report also mentions allegations of violent conflict with local workers over and this is quite interesting “the quality and integrity of the work executed by local workers”. 

Interestingly, a secondary steel project in Bengal recently acquired sudden notoriety after 70-odd Chinese engineering workers allegedly beat up Indian workers following sharp differences over the quality and integrity of the work executed by local workers like fabricators and welders.

The conflict was so violent that the local police had to intervene, hospitalise a group of Indian workers and arrest some Chinese supervisors on specific assault charges, said a highly-placed bureaucrat in the West Bengal government. But he added that he did not expect such an incident to slow down the rush of Chinese project teams coming to India.

More from the Financial Times on Chinese involvement in India’s power infrastructure development.

India keen on FTA with Australia

According to The Australian, Minister Kamal Nath would like India to conclude an FTA with Australia by 2010. India and Australia are carrying out a joint feasibility study for an FTA. Here’s an extract from this report:

In an interview with The Australian, Mr Nath said that because the Indian and Australian economies were so complementary, an FTA should be relatively easy to achieve.

He believed it should cover trade in merchandise and services and two-way investment.

“We should try and conclude it by mid-2010, or even by the end of next year,” Mr Nath said.

India also wants Australian Uranium for its civil nuclear energy program and Nath touched on this issue as well.

Mr Nath also wants Australia to sell uranium to India, although the Rudd Government has reversed Howard government policy and said it will not sell uranium to India, even if India completes its nuclear energy deal with the US and wins approval for this from the International Atomic Energy Association.

“We do ask Australia to take a practical and realistic view (of uranium sales),” Mr Nath said.

“Australia is not the only source of uranium for India, but (it should be viewed) in the larger context of global warming and the larger relationship between Indian and Australia.”

And what do we make of this comparison with China. (It always used to be India versus Pakistan and now comparisons with China are common.)

Mr Nath said he wanted a much stronger relationship between India and Australia.

The New Delhi Government is known to believe the Rudd Government is obsessed with China and has an unbalanced foreign policy. Mr Nath would not be drawn on such subjects, but said: “The China story is an old story, while the India story is a new story. China opened up earlier so it obviously got a head start.”

The International Energy Agency deepens engagement with China and India

The current global focus on energy, climate change and their linkages with trade and investment policy will require engagement and informed responses from not only the Indian government, but also from Indian businesses in their growth strategies, both in India and overseas. Similarly, investors in India will be looking for opportunities and risks in these policy sectors in India.

As the action intensifies in the World Trade Organization, other multilateral and intergovernmental fora are also key sites where global policy in these areas is being negotiated.

Apart from the Climate Change talks in Bali, which involve trade and finance ministers for the first time, the International Energy Agency is also deepening engagement with both China and India.

India and China are not members of the IEA, whose current membership is limited to 27  industrialized countries. However, the IEA sees itself as entering a new phase in their work with India and China. An IEA press release gives more details:

06 December 2007 Paris — “As China and India become major players in global energy markets, it makes sense to share views with them on our common energy challenges”, said Nobuo Tanaka, Executive Director of the International Energy Agency (IEA) today in Paris. “For the first time ever, the 27 member countries of the IEA have invited high-level Chinese and Indian delegations to participate in “Committee Week” – several days focusing on key energy issues including emergency response preparedness, the outlook for oil, gas and coal markets, energy technology collaboration and energy efficiency measures. “We hope that this interaction will identify further opportunities for co-operation”, added Mr. Tanaka.
The week’s unprecedented activities included the convening of key IEA committees on emergency preparedness, oil markets, long-term policy co-ordination, energy research and technology, as well as the IEA Governing Board. A strong delegation from the National Development and Reform Commission (NDRC) and national oil companies represented China at the IEA. The Indian delegation included senior officials from the Ministry of Power, the Bureau of Energy Efficiency and the NTPC (formerly known as National Thermal Power Corporation). Representatives from all IEA member countries also participated.
“The presence of delegates from China and India around the table in our discussions this week underscores our mutual commitment to continue to work together and to find ways to ensure clean, reliable affordable energy for the future. This is a global challenge that we must face and overcome together”, said Mr. Tanaka.
The IEA has long recognised the accelerating globalisation of energy markets and the growing importance of rapidly developing economies in the shaping of global markets, energy security and environmental sustainability. This week has marked a step change in the IEA relationship with China and India, encouraging their greater direct involvement in the work of its main policy Committees. Much co-operation has occurred with China and India in improving energy data collection, energy efficiency, energy market reform policies, technology and the development of emergency preparedness and response systems. But the magnitude of the challenges calls for greater effort.
The IEA and China will reinforce their work on emergency planning and crisis management during an IEA Emergency Response Exercise (ERE) which will take place next June in Paris. It is designed to prepare IEA member countries for any oil supply disruption, but its lessons are transferable to countries developing their own emergency response capability – especially China and India. The IEA hosted senior Chinese statisticians in late 2007, to prepare a plan of co-operation on energy statistics, including energy efficiency indicator work, to lay the foundations for better informed energy policy-making. Recently, Chinese energy researchers met their IEA member counterparts – a meeting that significantly increased direct collaboration in energy research, development, demonstration and deployment in fields such as renewables, clean coal and demand-side management. A similar step is envisaged with Indian researchers in April of next year. To meet the challenge of climate change, China and India are invited to join the IEA in new work on Financing Low-Carbon Technologies in Emerging Economies.
The 2007 edition of the World Energy Outlook (WEO) focuses on China and India, identifying them as the world’s fastest growing energy markets, and underscores the importance of sharing our experiences with them and learning from theirs. “China and India are simply too important to ignore”, observed Mr. Tanaka. “It is my hope that the discussions during the past days will be a significant impetus for enhanced engagement with China and India”.

India gears up for energy trade

The Financial Times reports that an Indian government owned investment company is being readied to secure overseas coal resources to meet India’s growing energy requirements for its steel and power plants.

The FT also carries an accompanying report on India’s imminent struggle for energy supplies against Chinese competitition.

The country has the world’s fourth-largest coal reserves. But a mixture of bureaucratic red tape, poor infrastructure, corruption and social unrest around the mines means the growth of the country’s domestic coal-mining industry is not keeping pace with the demands of its rapidly expanding economy.

To overcome this, India’s biggest energy producers, from Tata Power to state-run companies such as National Thermal Power Corp, are on the hunt for offshore assets.

The move, combined with a government initiative to secure overseas supplies of coking coal for the steel industry, signals the extension of strategic competition for resources between China and India to a frontier beyond oil and gas for the first time.

If India is to sustain economic growth of 8 per cent a year, it will need to nearly double the capacity of its power industry from 135,000 MW today to 250,000 MW by 2015, according to Tata Power.

But India is already running a coal deficit, with coal demand last year for the steel and energy industries reaching 452m tonnes, of which 61m tonnes had to be imported.

By 2015, the country will be consuming about 800m tonnes of coal but will have to import more than a quarter of this, according to estimates from KPMG.

Meanwhile things are heating up for movement towards a new WTO accord on trade in energy. Pascal Lamy, the Director General of the World Trade Oreganization recently addressed the World Energy Congress and suggested that “The WTO can contribute to a more efficient allocation of energy resources and generally a better trading environment for energy”.

Gerald Doucet, World Energy Congress secretary-general is reported to have

urged WTO Members to “open a new chapter” of energy negotiations, looking in particular at new issues arising due to the need to significantly increase the use of clean and renewable energy. Currently, standards, subsidies and other measures to encourage the development and use of renewable energy have not been comprehensively considered within the WTO, leaving the legality of certain measures unclear.

Doucet warned against a “trade war between those who are concerned over carbon emissions and those who are not.” This could come about if countries with stringent climate change policies decide to slap border taxes on imports from nations that take a more lax approach to emissions controls.

BI-ME has a detailed piece on Lamy’s speech and on how energy trade already features in the ongoing Doha talks.

The first area where energy stands explicitly on the Doha agenda is the services negotiations. For the first time WTO members are discussing energy as a specific services sector.

Energy was not addressed in any comprehensive manner during the Uruguay Round, because the liberalisation of the sector was not yet on the political agenda. As a result, WTO members undertook limited commitments to open their markets to foreign operators in energy services, including services incidental to mining at oil and gas fields, services incidental to energy distribution — of, inter alia, gas and electricity — and pipeline transportation of fuels.
However, progressive unbundling of state-owned integrated utilities and technological developments have created room for private operators. This, in turn, has raised the profile of energy services in the WTO.

The current negotiations on energy services cover a broad range of activities relevant for energy companies and span all energy sources, including renewables. Commitments are sought on activities such as drilling; engineering; technical testing and analysis services; construction work for long distance and local pipelines, and for mining; wholesale trade services and retailing services of fuels.

The negotiations are addressing the establishment of commercial presence as well as easing the intra-corporate transfers of specialists and professionals working for energy services companies.

Furthermore, some WTO members have proposed to negotiate additional disciplines which would address, for instance, regulatory transparency, non-discriminatory third-party access to networks and grids, the need for an independent regulator, and requirements preventing certain anti-competitive practices. All this is already on the table.

A second area of the Doha Round relevant for you relates to clean technology. The Doha Round aims at opening markets to environmental goods and services. Many of these have a direct application for promoting energy efficiency, such as material needed for production of renewable energy, heat management and pollution control. Examples of environmental goods that have been proposed include wind turbines, solar panels, geothermal energy sensors, fuel cells and electricity meters. Eliminating or reducing tariffs on environmentally-friendly goods and technology would facilitate their wider dissemination.

Similarly, the negotiations on environmental services include negotiations on energy-relevant activities, such as services to reduce exhaust gases and improve air quality, nature and landscape protection services or services for the rehabilitation of mining sites. The environmental chapter of the WTO Doha Round can therefore make a very concrete contribution to the promotion of energy-efficient technologies. It is a contribution in the making that the trade community can bring to the upcoming UN Climate Change Conference in Bali.

A third area of importance comes under the “trade facilitation” negotiations. Here WTO members have been discussing possible improvements and clarification to the “transit” obligation contained in the old GATT rules that oblige member states to allow passage of goods in transit across their territories. This provision was drafted in 1947. In the current Doha Round, proposals have been tabled to clarify the meaning of this obligation and whether it includes fixed installations, such as pipelines.

Energy-related concerns also underlie proposals on export taxes and subsidies. There are proposals on the table addressing export restrictions on energy goods and other raw materials because these restrictions are more prevalent than in other traded goods, and represent a source of concern for importing countries as they increase prices of inputs. The question of subsidies in the form of low-priced energy products, especially natural gas, has recurrently stirred hot debates among WTO Members and is also part of the on-going negotiations.

Finally, Lamy said, the picture would not be exhaustive without a word about bio fuels. While bio fuels can provide us with the opportunity to address climate change, energy security and rural development, careful planning needs to be undertaken to make sure that they do not create new environmental and social problems. The negotiations to cut tariffs and discipline agriculture subsidies have the potential to contribute to the development of orderly trade in bio fuels.

 

It’s certain that the interlinked trio of issues: trade, energy supplies and climate change are likely to remain on top of the international negotiating agenda for some time.