China-India Economic Ties: Trade, Investment, and Opportunities

• China and India established a robust trading partnership in 2023, with bilateral trade reaching a record US$136.2 billion, reflecting a 1.5 percent increase from the previous year. This growth was bolstered by a 6 percent rise in Indian exports to China, emphasizing positive momentum in bilateral ties amid geopolitical tensions.
• Indian companies have increasingly established operations in China across various sectors, including pharmaceuticals and manufacturing, while over 100 Chinese companies are active in India, particularly in infrastructure and electronics. This mutual investment trend highlights the growing interdependence between the two nations.
• Despite challenges in their economic relationship, including fluctuating foreign direct investment (FDI) flows and geopolitical tensions, both nations remain committed to stabilizing relations and fostering cooperation, paving the way for future trade and investment opportunities.

Since establishing diplomatic relations in 1950, China and India have navigated a complex relationship characterized by both cooperation and competition. While the two Asian giants have faced challenges, particularly over their disputed Himalayan border, they have also fostered growing economic and trade ties. Recent years have seen notable developments, as both countries recalibrate their approaches to bilateral engagement, focusing on stabilizing their border while enhancing commercial collaboration.

Economically, China is India’s largest trading partner, with bilateral trade crossing US$100 billion in the 2023-24 financial year. China remains a vital supplier of industrial goods to India, particularly in electronics, machinery, and chemicals. The growing demand for Chinese technology and investment, especially in sectors like electric vehicle (EVs) and telecommunications, highlights the deep economic ties between the two countries. At the same time, India is actively seeking to attract Chinese companies to set up local manufacturing through new joint ventures in key industries.

In this article, we explore the evolving trade and investment relations between China and Indian and the potential for future collaboration across various sectors.

China-India bilateral trade

In 2023, China-India bilateral trade reached a new record of US$136.2 billion, marking a slight growth of 1.5 percent from the previous year despite mid-year economic slowdowns and ongoing geopolitical tensions. This increase in trade, including a 6 percent rise in Indian exports to China, reflects a positive momentum in bilateral ties, as highlighted by the Chinese Chargé d’Affaires, Ma Jia, during a Chinese New Year event in Delhi.

The growth in trade occurred amidst continued high-level interactions between the two nations, including a sideline meeting between Indian Prime Minister Narendra Modi and Chinese President Xi Jinping. While direct flights and full diplomatic appointments remain unresolved, the two sides have shown a commitment to stabilizing relations, with hopes for further cooperation and investment in the coming year.

According to the United Nations COMTRADE database, in 2023, India’s main exports to China were valued at US$16.25 billion. These exports included key sectors, such as organic chemicals, mineral fuels, ores, cotton, and copper.

Meanwhile, India’s total imports from China reached US$16.25 billion, reflecting in particular the critical role of Chinese goods in India’s industrial supply chain. On the import side, India’s imports from China in 2023 were dominated by electrical and electronic equipment, followed by machinery and nuclear reactors. Organic chemicals, plastics, and optical, photo, technical, and medical apparatus also featured prominently.

China-India bilateral investment

Investment flows between India and China have experienced notable fluctuations in recent years. According to Statista, foreign direct investment (FDI) from China to India reached approximately US$279.46 million in 2021, down from US$534.60 million in 2019 and US$205.19 million in 2020. The peak of Chinese FDI in India occurred in 2015, amounting to US$705.25 million.

Find Business Support

We can help you optimize your supply chain and improve your business resilience

This significant decline in FDI inflows is largely attributed to India’s revised FDI policy for countries sharing borders, implemented in response to the Sino-Indian border tensions in 2020. However, by mid-2022, the Indian government began to approve individual FDI proposals on a case-by-case basis, with reports indicating that as of June 29, 2022, 80 out of 382 proposals linked to China had received approval. Conversely, Indian investment in China has also seen a downturn, with FDI amounting to US$6.32 million in 2021, a decrease of 47.4 percent year-on-year.

By the end of 2021, cumulative Indian investment in China totaled US$943.96 million, according to data from the Chinese Ministry of Commerce.

These investment trends reflect the complexities and challenges faced by businesses in navigating the evolving economic relationship between India and China, emphasizing the impact of geopolitical tensions on cross-border investments.

Over the years, Indian companies have increasingly set up operations in China, spanning various sectors including pharmaceuticals, manufacturing, IT services, and trade. Many Indian firms in China focus on manufacturing industries, such as pharmaceuticals, auto components, and wind energy. Major Indian corporations like Dr. Reddy’s Laboratories, Infosys, TCS, Wipro, and Mahindra & Mahindra have established themselves in China through wholly owned foreign enterprises (WOFE), joint ventures, or representative offices.

Indian businesses are primarily located in major cities such as Shanghai and Beijing, with many also concentrated in important commercial centers like Guangzhou, Shenzhen, and Yiwu, a hub for wholesale markets. These companies aim to serve both the local Chinese market and their global clientele, leveraging China’s strategic position in global trade.

On the other hand, Chinese investment in India has also expanded, particularly in sectors like infrastructure, electronics, and mobile manufacturing. Over 100 Chinese companies have established operations in India, with state-owned enterprises like Sinosteel and Sino Hydro Corporation focusing on infrastructure and machinery. Chinese electronics giants, such as Huawei, ZTE, and Haier, have made inroads into India’s IT and hardware manufacturing sectors. Chinese mobile manufacturers like Xiaomi, Vivo, and Oppo have become dominant players in India’s mobile handset market, collectively accounting for a significant share of the market.

The mutual investments between the two nations highlight the growing economic interdependence and complement the substantial trade relationship between India and China.

Trade and investment treaties

China-India bilateral investment agreement

The Agreement Between the Government of the Republic of India and the Government of the People’s Republic of China for the Promotion and Protection of Investments (BIT) outlines the framework to promote and protect investments between the two countries. It focuses on fostering favorable conditions for mutual investments, ensuring fair treatment, and safeguarding the rights of investors. Here are some key provisions from the agreement:

• Promotion and protection of investment (Article 3): Both countries commit to creating favorable conditions for investors from each other and guaranteeing that their investments receive fair and equitable treatment. This includes protection against arbitrary or discriminatory actions.
• National treatment and most-favored-nation treatment (Article 4): Investors from both countries will receive treatment no less favorable than that given to domestic investors or those from any third state. This ensures equality in terms of investment opportunities and protections, though certain exemptions, like taxation matters, are carved out.
• Expropriation (Article 5): Investments cannot be nationalized or expropriated unless it is for a public purpose, in accordance with the law, and involves fair compensation. Investors have the right to legal review of such cases, ensuring transparency and equitable treatment.
• Repatriation of investment and returns (Article 7): Investors are allowed to freely transfer their capital and returns from investments between the two countries without undue delay. This ensures liquidity and financial flexibility for cross-border investments.
• Settlement of disputes (Article 9): Any disputes between investors and the contracting parties are to be settled amicably through negotiations. If unresolved, disputes can be referred to arbitration, including international arbitration bodies like the ICSID, to ensure a neutral and fair resolution process.

These provisions help create a secure environment for investors from both China and India, encouraging economic cooperation and boosting mutual prosperity through protected and well-regulated investment channels.

China-India double taxation avoidance agreement

The Double Tax Avoidance Agreement (DTAA) between India and China, effective since November 1994 and amended in 2018, serves to mitigate the burden of double taxation on individuals and businesses operating between the two nations. The DTAA between India and China offers significant advantages for residents of both countries by providing tax benefits and promoting trade and investment. It clarifies taxation systems, helping to avoid disputes over revenue allocation. Taxpayers gain transparency regarding their tax liabilities, and income tax can be deducted in both nations to a certain extent, preventing unfair advantages.

The DTAA pertains to income and capital taxes imposed by both China and India. In China, it covers:

• The Chinese individual income tax (IIT); and
• The Chinese corporate income tax (CIT).

In India, the agreement applies to:

• Income tax including surcharges

The DTAA covers a range of income categories, with specific withholding tax rates applied to various types of income:

• Dividends: 10 percent;
• Royalties: 10 percent;
• Interest: 10 percent (exempt for certain government-related entities);

Under the DTAA (Article 13), capital gains from alienating movable property tied to a permanent establishment or fixed base are taxable in the Contracting State where the property is located. Gains from selling shares of companies primarily owning immovable property, as well as immovable properties themselves, are also taxed in the state where the property resides. Additionally, gains from ships or planes used in international traffic are taxed in the residence state of the seller. Other property-related gains are similarly taxed in the state where the property is located.

Multilateral treaties

China and India, both members of the WTO, are signatories to various multilateral treaties concerning trade and investment. These include:

• TRIPS, which mandates WTO members to extend intellectual property rights to owners in any member state. It incorporates a most-favored-nation (MFN) clause, ensuring equal treatment for IP rights protection across all member countries. Additionally, it provides mechanisms for dispute resolution and compensation.
• The Agreement on Trade-Related Investment Measures (TRIMs), which prohibits the implementation of investment measures that restrict trade between members. This includes measures like local content requirements, which mandate the use of locally-produced goods or services by companies operating in a market.
• GATS, which grants most-favored-nation status to service providers of any WTO member, excluding governmental services such as social security, public health, education, and certain services related to air transport.

Potential cooperative opportunities between China and India

Cultivated diamonds

China, India, and the United States are the top markets for the production, processing, and consumption of cultivated diamonds. A significant number of cultivated diamonds follow the flow from China to India to the United States. Both China and India have their own strengths in the cultivated diamond sector. China excels in areas such as equipment development and technological innovation, while India, with its long history of gemstone processing and efficient techniques, holds a significant position in the global diamond cutting industry. This complementarity provides a foundation for cooperation between the two countries in this field:

• Upstream supply:Currently, only two technological routes, High-Pressure High-Temperature (HPHT) and Chemical Vapor Deposition (CVD), can commercially produce rough cultivated diamonds, with China accounting for over 40 percent of the production. Major producers include companies like Zhongbing Hongjian, Huanghe Whirlwind, Power Diamond, and Zhengzhou Huajing.
• Midstream processing: India dominates the global polishing market. The midstream segment involves cutting, processing, polishing, and grinding of cultivated diamonds, primarily concentrated in Surat, India. Approximately 700,000 people in Surat are engaged in the diamond processing industry, handling nearly 90 percent of the world’s rough diamond cutting and processing. Compared to natural diamonds, cultivated diamonds offer higher profitability for the midstream sector. As of March 2022, 10 percent of diamond factories in Surat were processing cultivated diamonds. In March 2022, India’s imports of rough cultivated diamonds amounted to US$203 million, a year-on-year increase of 157.1 percent, while exports of polished cultivated diamonds reached US$137 million, a year-on-year increase of 59.45 percent.

Despite some challenges, the complementary advantages, market demand, and global market competition pressure suggest that China and India have the potential for win-win cooperation in the cultivated diamond industry. This requires both sides to maintain an open mindset, strengthen technical exchanges and cooperation, jointly address market challenges, and promote the sustainable development of the cultivated diamond industry. Governments and enterprises should also provide necessary support and guidance to create favorable conditions and environments for deep cooperation in this field.

Pharmaceuticals

The trade of active pharmaceutical ingredients (APIs) between India and China is a crucial area of their pharmaceutical trade. Despite India’s recent policies to support its domestic API industry, China remains the main source of APIs and pharmaceutical intermediates for India.

Find Business Support

Expanding your business in Asia? We can help you find the optimal location for your next investment

According to the Pharmaceuticals Export Promotion Council of India (Pharmexcil), from the fiscal year 2018 to 2022 (April to March), India’s imports of APIs and pharmaceutical intermediates from China were US$2.4 billion, US$2.32 billion, US$2.62 billion, US$3.13 billion, and US$3.18 billion, respectively. During the same period, India’s total imports of APIs and pharmaceutical intermediates were US$3.56 billion, US$3.41 billion, US$3.84 billion, US$4.72 billion, and US$4.5 billion.

In 2023, according to Indian customs data, the trade value of 53 types of APIs imported from China was US$2.288 billion, a year-on-year increase of 27.75 percent.

Further analysis shows that among the top 10 API products imported from China, only the import values of 7-ACA and meropenem slightly decreased, while the import values of penicillin industrial salt, 6-APA, azithromycin, p-aminophenol, ceftriaxone sodium, dicyandiamide, meropenem, D-7-ACA, potassium clavulanate, and erythromycin thiocyanate did not show significant changes.

With the development of India’s API industry, China’s related industrial chain indeed faces challenges from India. In the first three quarters of the fiscal year 2023-2024, India’s API imports from China decreased by over 9 percent. However, the scale of direct API exports by Indian pharmaceutical companies is much smaller than that of formulations, and most are for their overseas pharmaceutical plant partners or joint ventures. Additionally, according to a report released by Care Rating, India’s second-largest credit rating agency, in August 2023, given the growth expectations of the pharmaceutical industry and the increasing demand for APIs, India’s overall dependence on Chinese API imports will remain high.

Other sectors

Beyond these sectors, China and India have the potential for win-win cooperation in various other industries. For example:

• Manufacturing: Although China and India have their own strengths in manufacturing, they complement each other in different segments of the industrial chain. China has a strong industrial base and production capacity, while India has unique advantages in certain manufacturing sectors. By enhancing communication and cooperation, both countries can improve their manufacturing levels, achieve complementary advantages, and share resources.
• Information technology: Both China and India have rich resources and talent reserves in the information technology sector. They can collaborate deeply in software development, data analysis, artificial intelligence, and other fields to drive innovation and development in information technology.
• New energy: With the global emphasis on environmental protection and sustainable development, the new energy industry has become a key area of development for many countries. China and India have a certain foundation in solar and wind energy. They can strengthen cooperation in new energy technology research and development, equipment manufacturing, and market promotion to jointly promote the development of the new energy industry.
• Infrastructure construction: China has accumulated rich experience and technical strength in infrastructure construction, while India’s infrastructure still needs improvement. Both countries can cooperate in transportation, communication, power, and other infrastructure fields to promote regional connectivity and economic development.
• Agriculture: Agriculture is a pillar industry in India, while China holds a significant position in the global agricultural products market. Both countries can strengthen cooperation in agricultural technology, agricultural product processing, and market marketing to improve agricultural production efficiency and product quality, promoting sustainable agricultural development.

Future prospects

In the short term, India’s export substitution for China is not significant due to two main reasons:

• Different scales and comparative advantage areas: Precious metal processing and chemical pharmaceuticals are India’s main export products. These areas have low overlap with China’s advantageous export categories. India faces competition from South Africa, Brazil, and Chile in precious metal processing and from Canada and Mexico in chemical pharmaceuticals, limiting its export scale.
• General manufacturing competitiveness: Although India’s manufacturing competitiveness in machinery, textiles, apparel, and electronics has visibly improved in recent years, it still cannot compare with China and Vietnam in scale and volume. In machinery manufacturing, India faces fierce competition from China, Europe, Japan, South Korea, and even Thailand, with no significant features in scale and technology.

In the long term, India’s manufacturing sector warrants attention. With its growing economy, India has the potential to attract manufacturing transfers, which could challenge China’s manufacturing exports. As the two largest economies by population, increased communication and collaboration between China and India could foster mutual benefits and drive economic growth for both nations.

• Previous Article Unlocking China’s V2G Potential: Opportunities and Challenges in the Evolving Market
• Next Article