Red Alert: Heat now on Chinese investments in India with PLA links

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Enter the Dragon. And how! As Boycott China chorus gains global traction and India takes the lead by banning 59 Chinese apps posing a threat to national security, the spotlight  seems to be steering towards deep-rooted Chinese investments in India and the latent threat of military and economic espionage.

A scan of available records and data points reveal that nearly $6.2 billion of Chinese money has made its way into the Indian economy in multiple sectors including Indian startups, tech companies, smartphones and applications or apps. Investments from China have mostly taken the FDI route with distinct investments in nearly 90 projects in India’s IT and electronics sector between 2015 and 2019.

According to a report published earlier this year by foreign policy think tank Gateway House, China quietly has created a significant place for itself in India in the last five years – in the technology domain. Unable to persuade India to sign on to its Belt and Road Initiative (BRI), China has entered the Indian market through venture investments in start-ups and penetrated the online ecosystem with its popular smartphones and their applications (apps). Chinese tech investors have put an estimated $4 billion into Indian start-ups alone.

A closer look at Ministry of Corporate Affairs’ ‘Invest India data’ reveals Chinese IT and tech companies like Xiaomi, Oppo, Vivo, and Huawei secured 100 per cent FDI in contract manufacturing in India and set up manufacturing hubs in Greater Noida, Andhra Pradesh and Tamil Nadu. Chinese auto majors including MG motors, BYD auto, Colsight, YAPP Automobiles meanwhile have also successfully scaled up their presence in India over the last few years. As per Ministry of Commerce, Chinese auto giant BYD Motors has been the biggest beneficiary of the government’s FAME scheme for supplying electric buses to state governments.

What is now raising eyeballs is the shadow of China’s People’s Liberation Army (PLA) behind investments in Indian firms.

Take Xindia Steels Ltd for instance. Considered as one of the largest Joint Ventures (JVs) between India and China, it has also commissioned a 0.8 mtpa Iron Ore Pelletisation facility in Koppal District, adjacent to Hospet, in Karnataka, at a total cost of slightly over Rs.250 Crores. Its main investor is Xinxing Cathay International Group Co Ltd (China) which as per the company website, is reorganized, reconstructed and unhooked from previous Production Department and subordinate enterprises and institutions of the General Logistics Department of the PLA. The Xinxing Cathay International Group, with a
turnover of almost Rs.3,000 crore, already supplies about 30,000 tonne of ductile iron
pipes to India.

China’s leading military electronics manufacturer – China Electronics Technology Group Corporation or CETC – meanwhile announced a US$46 million (Rs 320 crore) investment in a 200 MW PV manufacturing facility in Andhra Pradesh based Sri City in 2018 . CETC also makes Hikvision CCTV cameras. Several CETC research institutes and subsidiaries have been added to the US Government’s entity list, restricting exports to them on national security grounds. CETC has been implicated by the US Department of Justice in at least three cases of illegal exports. What is of concern is that many CETC employees have
also been convicted for military espionage. CETC is also ill-famed for providing technology used for human rights abuses in Xinjiang, where approximately 1.5m are held in re-education camps.

Huawei, which has recently been banned from operating in the United States by Trump administration, incidentally was founded by a former deputy director of PLA’s engineering corps Ren Zhengfei in 1987 in Shenzhen. Huawei’s reported revenue in 2018-19 stood at Rs 12,800 crores from its Indian operations.

As per a 2019 report of the United States-China Economic and Security Review Commission, a congressional commission of the US government which monitors and investigates national security and trade issues between the United States and China, “Chinese government’s Military-Civil Fusion Policy aims to spur innovation and economic growth through an array of policies and other government-supported mechanisms, including venture capital (VC) funds, while leveraging the fruits of civilian innovation for China’s defense sector”. This is raising fresh questions on Chinese VC investments in India as well including Alibaba and Tencent.

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A part of China’s AI team along with Baidu and Tencent which is working at developing AI in a range of sub-domains for China under Military-Civil Fusion Policy, Alibaba has made strategic investments in the Indian start-up domain and and its portfolio includes payments firm Paytm, and its e-commerce arm Paytm Mall, food delivery startup Zomato, online grocer BigBasket, Snapdeal and logistics firm Xpressbees.

Intelligence and security expert, S Jayadeva Ranade, who is a keen observer of China, says the matter is extremely grave.

“We cannot afford to ignore this at any cost. The problem is we also take time to react. Our reaction must be immediate. What stops us from saying upfront we won’t allow Huawei in 5G trials,” he says.

A senior analyst working in the data sovereignty domain says while data breach is for real, essentially the investments are linked to the Politburo of the Chinese Communist Party. “Who are these VCs who have funded Indian enterprises needs a thorough look. In China, ultimately everything is controlled by the Army and retired officers through their friends and family continue to pull the strings,” he says.

Tencent on its part made massive investments in virtually every sphere of India’s tech spectrum from transport & food delivery to education and health. Its first notable investment was US$400 million in Ola Cabs, which came at a time when both Ola in India and the Tencent-backed Didi Chuxing in China were in a cut throat competition with rival Uber. This was followed by a US$700 million investment in Flipkart, in a deal that made Tencent the biggest Chinese investor in India.

Also Read:Red Alert: Post ban on Chinese apps, Chinese Govt owned Radisson, raises security fears in India

Tencent has acquired a diversified portfolio in India, targeting stakes in the biggest players in every vertical, from leading a US$175 million fund-raising round into Hike Messenger to a US$90 million injection in the healthcare startup Practo, which was followed by another US$55 million round.

In the education space, it has invested US$40 million in the learning app Byju’s, following up with US$11.4 million in a subsequent funding round. Tencent made an entry into the food delivery space, joining its shareholder Naspers in a US$1 billion funding round for Swiggy, a rival of Alibaba-invested Zomato. It has also invested US$100 million in Dream11 Fantasy, as part of reported plans to spend US$200 million in the online gaming space in India, and led a US$115 million funding round into the music streaming service Gaana. Tencent, like ByteDance, also entered the news space, leading a US$50 million round into the aggregator app NewsDog.

On the auto front, SAIC Motor Corporation Limited is the parent company of MG Motors, which sells MG Hector in India. One of the subsidiaries of SAIC is Nanjing Automobile- which was previously a vehicle servicing unit of PLA.

Noted economist Dr Suman Mukherjee, who has been associated with Ernst & Young and in senior advisory capacity with the government, says, “The ulterior motive is clear. This is PLA infiltration through a circuitous route. They are virtually breathing down our neck and have access to all our data. Chinese investments essentially are a front for economic espionage. They have invested in foward looking turn around ventures and have the blueprint of our plans, future dreams, aspirations, the supply chain model. We should put an embargo on Chinese investments and ask them to sell their shares to us an leave.”

Gateway House researchers Amit Bhandari and Aashna Agarwal in their report draw attention to the nature of Chinese investments in India as compared to India’s neighbourhood. “China’s economic footprint in India seems negligible compared to its presence in other emerging markets, especially in South Asian countries such as Pakistan, Sri Lanka, Myanmar and Bangladesh. Whereas investments in these countries is mostly in physical infrastructure, Chinese funding to Indian tech start-ups is making an impact disproportionate to its value, given the deepening penetration of technology across sectors in India,” they say.

China’s legislature passed a new intelligence law in June 2017 which gave new powers to monitor suspects, raid premises and seize vehicles and devices. As per the Annual report of the US Secretary of Defense to the Congress on the ‘Military and Security Developments involving the People’s Republic of China 2019’, this law mandates Chinese companies, such as Huawei, ZTE, Tik Tok and others to support, provide assistance, and cooperate in China’s national intelligence work, wherever they operate.

Article 7 of the Law states “Any organization or citizen shall support, assist and cooperate with the state intelligence work in accordance with the law.”

This for sure has direct security implications for all overseas FDI from China.

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