Special Article

The Forward Policy & South Asia
Mahendra P Lama

China is everywhere in South Asia, both physically as an agent of globalization, and conteptually as a growth model. While the focus has revolved around the possible conflict dynamic between India and China, Beijing’s engagement with states and societies across the region presents a far more complex reality. Multi-layered, this linkage spans across border trade, joint ventures and macro-level investment to strategic alliances and political interaction.

It was not always this way. Beijing’s engagement with South Asia can be understood only in the larger framework of the basic change in its approach to economic growth and international politics. In the last 50 years, China has transformed itself from an astute proponent of ideological outreach and a covert supporter of insurgency to a builder of modern cross-border infrastructures and a wild market-grabber. It has gotten rid of the Maoist jacket, though Beijing is still reluctant to acknowledge its acceptance of the capitalist robe.

As China projects itself as a country on the move, it is trying hard to prove that democracy and development have no correlation. South Asians devour this ambiguity, as the subcontinent itself is a reservoir of scattered thinking, ambiguous planning and policy measures of marginal utility. As China showed meteoric rise in terms of growth, global market influence and as an advocate of exclusive ‘Asian values’, a potentially powerful South Asia realized the wider utility of its mammoth neighbor.

For its part, Beijing’s interests in South Asia can be linked to three abiding and powerful objectives, which form its ‘forward policy’ in this region. These include expansion of its military base and strategic access; economic and commercial penetration into the huge South Asian market and, through it, to West Asia; and managing its own potential internal instabilities. 

Melting the ice
In the mid-1980s, China realized that national security could be ensured through Mulin Zhengce, better relations with neighboring countries. For a country with ‘diverse international regions’, the end of the Cold War brought an opportunity to broaden its foreign policy options. It faced the enigmatic challenge of remaining “a regional power without a regional policy”. This is where Communist Party of China leader Deng Xiaoping’s advocacy of a comprehensive Zhoubian Zhengce (periphery policy) became both handy and far-reaching.

By 2003, Pakistan’s balance of trade deficit with China had increased to USD 1.3 billion, Bangladesh’s to USD 1.3 billion, Sri Lanka’s to USD 484 million and Nepal’s to USD 166 million. 

China started consciously designing a clear regional policy based on wending zhoubian (stabilising the periphery). Determinants like political system-ideology linkages (buyi yishi xingtai he sheshui zhidu lun qingsu) and superpower alliance (yimei huaxian, yisu huaxian), which had been the fundamental basis and hallmark of its foreign relations, were increasingly abandoned.

These policies emanated partly from the realization that the reforms and growth -- key to halting and preventing domestic political turmoil -- needed a larger playing field. Deng Xiaoping was convinced that if China was to emerge as an economic powerhouse and a flag-bearer in the emerging “new Asianism”, it was critical to have a favorable international environment. South Asia, and more specifically India, has been central in this rapprochement game. With Prime Minister Rajiv Gandhi’s visit to China in 1988, much of the ice around the frigid and hibernating McMahon Line melted. New Delhi and Beijing started rethinking and renegotiating their respective positions.

New China has been trying to woo South Asia in exactly the same manner that it has successfully built relations with other neighboring regions. The model has three levels of engagement – the local, national and regional. 

Crossborder integration 

Nathula: cleared for trade 
China has shown remarkable acumen in understanding the significance of local-level economic interaction. Beijing’s extensive use of border trade as the main instrument of economic integration is reflected by some startling figures – half of the country’s foreign trade of USD 1 trillion is conducted through its 120 inland towns and ports. The policy of encouraging local-level trade can be seen in China’s dealings with South Asia as well. On the India-China border, the Lipulekh pass trade route connects Dharchula-Pithoragrah in Uttaranchal with Taklakot in the Purang County of the Tibet Autonomous Region (TAR), while the Shipkila pass connects Namgya-Kinnaur in Himachal Pradesh with Jiuba in Zada County in the TAR. Both of these trade routes, which opened in 1992, are in difficult and rugged terrains and are highly seasonal.

Though a significant section of policy echelons in India considers the recent reopening of the Nathula route in Sikkim as a mere symbolic border-trade venture, China, in the long-term, is looking at it as a vital economic entry point into the 1.3 billion-strong Indian market. In terms of feasibility, this is arguably the shortest route (roughly 590 km between Lhasa and Gangtok) to reach the ever-bourgeoning middle class in the Indian mainland, Bangladesh, Bhutan and Nepal.

The completion of the 1142 km railway from Golmud city in Qinghai province to Lhasa, and the refurbishing of overland access through the Sichuan-Tibet Highway, are also important developments. These could completely transform the physical accessibility to and from mainland China for Tibet, as well as the neighboring provinces and countries bordering Tibet, which is where South Asia factors in. For India, the new transport infrastructure of this nature can open access to other business centers in China’s western, eastern and southeastern regions.

It would be incorrect to think that trade across Nathula or other border points will be confined to limited interactions among crossborder communities. This was the assumption in the border trade between Nepal and Tibet at Khasa, and between India and Burma at Moreh in Manipur. However, the actual volume, composition and direction of trade in these routes have far surpassed the local communities and local products. Restrictions have only encouraged the illegal and surreptitious aspects of trade, which has flowed regardless.

China-South Asia Trade Volume (Million USD) 

Countries/Region 1990 1995 2000 2003 
Afghanistan 24 49 27 27 
Bangladesh 173 678 917 1368 
Bhutan 0.03 0.2 2 2 
India 270 1163 2834 7595 
The Maldives 0.5 0.8 1 3 
Nepal 47 54 205 127 
Pakistan 575 1012 1126 2430 
Sri Lanka 97 241 456 524 
Southasia 1186 3197 5568 12077 
Source: Direction of Trade Statistics Yearbook, International Monetary Fund (IMF), April 2005 


Besides the older Kathmandu-Kodari highway that passes through Khasa there are other important transit trade posts, either operational or in the offing, for overland trade between Nepal and China. These points include Rasuwa, Mustang, Olangchungola, Kimathanka, Lamabagar, Larke, Mugu and Yarinaka. Though agreements allow for a Free Trade Zone within 30 km of the Tatopani customs office, the Nepal-China trade through the Khasa route has acquired robust dimensions. Nepal’s exports to Tibet increased from almost USD 2.4 million in 1991-92 to USD 7 million in 2000-01, and imports went from USD 16.2 million to USD 153.9 million during the same period.

China has a history of using other countries as bases for exporting its own goods. In the case of Southeast Asia, it has utilized Singapore as a center from which to tap the markets of Thailand, Malaysia, Indonesia and even Australia. Hong Kong is also used in this manner, to export Chinese goods to European and American markets. The proposal to use Nepal as a transit point for India-China trade is primarily raised in this context. The fact that most of the Chinese goods that come to Nepal find their ways into the Indian market only confirms this conviction. China is seeking a somewhat similar kind of access through the Karakoram Highway in Pakistan.

Decentralized communism
The fact that the impetus for such local-level initiatives is coming from a communist republic, traditionally associated with complete centralization, is striking. China has departed from the conventional understanding of Maoism not only in its economic model but also in terms of political management. It has granted a level of autonomy to its provinces, allowing smaller units to engage with counterparts across borders.

There have been several visits by government officials and private-sector executives from Yunnan Province to the eastern states of India. Their agenda has been to establish trade and investment linkages with the vast, untapped market of eastern India. These delegates give the impression that they have been given a ‘free hand’ by their federal government to negotiate the larger process of the Kunming Initiative, which has been actively promoting the reopening of the Stilwell Road, built by US forces during the Second World War (See Himal Sept-Oct 2005, “The Stilwell Road: Straight Ahead?”).
This is certainly a successful sequel of the decentralizing strategy China followed since 1979. The Party Central Committee had then allowed Guangdong and Fujian provinces to adopt “special policies and flexible measures”, particularly with regard to investment and trade in the Special Economic Zones. The single-mindedness with which they are pursuing this initiative is reflective of Yunnan’s involvement in other economic zones at the provincial level, such as the Greater Mekong Sub-region (GMS).

China can make a significant difference in either consolidating SAARC through substantive cooperation-integration action, or eroding its functioning through counteractive action against the traditionally established pivotal role of India. 
The Chinese decentralized approach stands in stark contrast to the centralized mechanism adopted by India. India has traditionally maintained foreign trade and investment as an exclusive domain of the Union government, wherein the relevant constituent states are only ‘consulted’. An initiative like Kunming fits well into India’s ‘Look East’ policy and its participation in the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC). However, these cooperative mechanisms have not really kicked off because the notion of ‘local engagement’, and using trans-local actors, is something with which New Delhi has not yet come to terms.

It is clear that China has allowed levels of autonomy in trans-border contact, and is pushing for more open trade across its borders, in order to bring its own periphery provinces into the national mainstream. This is particularly true of the western region, which is comprised of nine provinces and autonomous regions – Gansu, Guizhou, Ningxia, Qinghai, Shaanxi, Sichuan, Tibet, Xinjiang and Yunnan, in addition to Chongqing Municipality. The west covers two-thirds of the nation’s territory, has a population of nearly 23 percent of the national total, and possesses abundant natural resources – but lags significantly in growth. After eastern China’s 14,000 km-long coastline brought fortunes to the country over the last two decades, it is now western China, with 3500 km of land frontiers that, it is hoped, will emerge the new economic frontier. 

The accelerated growth and development in these politically volatile provinces and regions could do much to quell the political dissent that is always just below the surface. The Chinese government launched its ‘develop-the-west’ campaign in 2000.

Beijing Review 
Rajiv and Deng, 1988 
A number of preferential policies were offered to the western region, including capital input, investment environment, internal and external opening up, development of science and education, and human resources. Crossborder trade received a fillip under this policy. 

Facts and figures
At a broader level, the economic interest of both South Asia as a whole and China deeply coincide. The Chinese side would gain tremendously both through market access to the region, and by importing specific commodities like pharmaceuticals, software, cotton, rubber, iron ore, bauxite, mica and even semi-finished engineering and chemical goods. For their part, if South Asian countries can gain access to even a miniscule share of the huge Chinese market, it would bring significant economic dividends.

The past decade has seen a spurt in the level of integration in terms of trade, investment, tourism and infrastructure projects. China’s trade with South Asia has recorded over a tenfold jump, from USD 1.2 billion in 1990 to USD 12.1 billion in 2003 (see Table 1). Bangladesh and Pakistan respectively recorded an eightfold and fourfold increase in their trade with China during this period. Even countries like Afghanistan and Bhutan are now having handsome trade exchanges with this country. The total volume of Sino-Indian trade increased from a mere USD 3.4 million in 1970 to USD 2.9 billion in 2000, and further to over USD 14 billion in 2005. The figure is expected to cross USD 20 billion by 2008.

Pakistan and China are presently negotiating a free trade agreement. However, except for India, which had a surplus of USD 907 million in 2003, most of the other countries face a huge and burgeoning deficit in their trade with China. By 2003, Pakistan’s balance of trade deficit with China had increased to USD 1.3 billion, Bangladesh’s to USD 1.3 billion, Sri Lanka’s to USD 484 million and Nepal’s to USD 166 million.

The two-way investment links between India and China are deepening as well. According to Beijing’s Ministry of Commerce, there were 101 Indian investment projects in China by the end of 2003, with the total contracted investments amounting to USD 235 million. These are mostly in pharmaceuticals, information technology, agricultural items, automobile components, software and the like. Some of the Indian companies involved include Tata Exports (Shanghai), Lupin Laboratories (Guangzhou), State Bank of India (Shanghai), Aditya Birla Group, Dr Reddy’s Laboratories and IT software companies such as Aptech, NIIT, Tata Consultancy Services and Infosys.

China ranks at just 24th in the list of countries in approved by New Delhi in 2003 for cumulative foreign direct investment (FDI). During the period between January 1991 and August 2003, India approved FDI of USD 231 million and a total of 97 Chinese proposals for foreign collaborations. These were mainly in the telecom, metallurgical, transportation, electrical equipment and financial sectors. The first project between India’s Mideast Integrated Steel Limited and China Metallurgical Import Export Corporation was commissioned in Orissa in January 1993.

China has also made a conscious effort to build linkages with the smaller countries of the region. In 2004, Bangladesh received a total foreign investment of USD 660.8 million. China was ranked 13th in the list of countries in terms of cumulative FDI, while India was slightly ahead at the 11th position. In Nepal, China had the third-largest share (9.2 percent) among the industrial joint ventures set up between 1988-89 and 2002-03. This private entrepreneurial participation is an interesting development, for China’s economic interaction with Nepal was dominated by liberal economic assistance in the past. Beijing helped in several infrastructure projects, including the Sunkosi hydroelectric project, and the Prithvi and Kodari highways.

Pakistan has become an important hub for Chinese investment. The Chinese firm Meteorological Construction Corporation’s investment of USD 73 million in zinc and lead exploration and a mineral-development project in Balochistan is indicative of China’s quest for raw materials. Chinese bicycle-manufacturers rolled out over 150,000 bikes from its units located in Hyderabad, Lahore, Karachi and Gujrat in Pakistan. Very recently, a Chinese company decided to invest USD 300 million in Total Telecom, a local company, which will make it a very large player in Pakistani telecommunications, having an overwhelming stake in a leading cellular operator.

However, the biggest Chinese investment in the region is at the Gwadar deep-sea port on the Balochistan coast, 460 km from Karachi. Located at the mouth of the Persian Gulf and outside the Strait of Hormuz, enjoying a high commercial and strategic importance, Gwadar is likely to be increasingly used for energy import. This is accompanied by the construction of the coastal highway to Karachi. Islamabad’s recent decision to invest in connecting Gwadar port by rail so as to streamline cargo movement indicates the great expectations it has for Gwadar. Its presence in Gwadar provides China with easy access to the Persian Gulf. Along with its access to the Bay of Bengal through Burma, Gwadar has overhauled China’s maritime security and given it total access from the mountains to the sea. 

Deepening linkages
At the regional level, China’s silent quest to enter SAARC has been partially fulfilled, with it recently having obtained observer status in the regional forum. This is another route that China hopes to use to effectively enter the South Asian market. China has never been a part of the subcontinental past, its political ethos or its cultural panorama, and may not fit into South Asia’s complex socio-economic composition and political culture. Possibly to camouflage this oddity, the US, EU, Japan and Korea have also been given the same status in SAARC. However, it must be accepted that China is in a different league. It can make a significant difference in either consolidating SAARC through substantive cooperation-integration action, or eroding its functioning through counteractive action against the traditionally established pivotal role of India.

China’s SAARC venture finds a striking parallel in its status in the Association of South East Asian Nations (ASEAN) Regional Forum, where it is doggedly presenting its case for full membership. The vital role it played in the Kuala Lumpur East Asia Summit in 2005 only shows that it aspires to thwart any attempt by other global entities to assert their power in the region.

In fact, China’s traditional goal of enhancing national power remains intact in its South Asia mission as well. What has changed is its use of sophistication in diplomacy, diversity of means, and deployment of newer instruments and a variety of engagements. It is still anybody’s guess as to whether the change in China’s attitude towards India will be sustained on a protracted basis, especially in terms of resolving core boundary disputes, but there is no doubt that Beijing is giving it a serious try.

What is striking in all this is the seemingly irreversible nature of the growing economic engagement between China and South Asia. These economic ties cannot be withdrawn with the flick of a switch when tensions flare. China, which is concerned about its credibility as a friendly neighbor and responsible power, is expected to further build upon the developing relationship with India, rather than uproot it under the pretext of national security.

There is little doubt that the relationship between China and South Asia will play a key role in shaping the structure of the international system in the days to come. Deep linkages and Beijing’s increasing presence in the region indicate the immense potential for cooperation. At the same time, geo-economic ties are accompanied by a level of political competition, especially in the Sino-Indian context. It is imperative that a mutually beneficial mechanism is created that overcomes the conflict dynamic. The engagement between China and South Asia must be navigated in a manner that benefits all participants – China and the individual countries of our region.