China and the ongoing Iran-US Conflict

Bihu Chamadia, Research Intern, ICS

The US-Iran conflict has been a long drawn one but it wasn’t until recently that the Middle East witnessed the involvement of another powerful actor in the region. Of late, China’s role in the Middle East has become more proactive. China has been trying to fill the void created by the current US leadership. In the past, The US intervention in Middle East has been twofold – both in terms of military presence as well as civilian efforts. However, the present era in the Middle Eastern region has been characterized as ‘post-American era’. This majorly indicates that while the US’s military presence remains the same there has been a massive decrease in the civilian and diplomatic efforts in the Middle East by the US. China has been trying to fill the long stretches of soft power diplomacy left by the US’s decision to ‘go out’ from the region. While the US-Iran conflict has exacerbated tensions in an already conflict ridden region, China’s rise as a global actor and its Belt Road Initiative (BRI) has led to its greater involvement in the Middle East. As such, it can rightly be said that China’s policy in the Middle East has undergone a big shift – from the policy of non-intervention to that of ‘crisis diplomacy’.

China’s response to the ongoing US-Iran crisis can be described as both strategic and balanced. As a responsible global actor and an important stakeholder in the region, China has given a call for upholding international norms and has been critical of any country that has tried to undermine it. China has been critical of the US actions in Iran especially with regards the following:  the US pulling out of the Joint Comprehensive Plan Of Action (JCPOA) or the Iran Nuclear deal, imposing sanctions on Iranian oil imports and the killing of Iranian major general in the Islamic Revolutionary Guard Corps (IRGC) Qasem Soleimani. All the above actions have received condemnatory reactions from China but not without an act of balancing.

The US pulled out of the Iran Nuclear Deal in 2018 calling it “a horrible one-sided deal that should never, ever have been made”. China responded by expressing regret over the US’s decision. China mentioned that it “will take an objective, fair and responsible attitude, keep communication and cooperation with all parties concerned, and continue to work to maintain the deal.” China’s response to US’s pulling out of JCPOA can be viewed in a similar light as its response to US’s backing out of various multilateral agreement including the Paris Agreement. While US has been continuously pulling out of various multilateral international agreements China has been continuously giving calls to “Work Together to Build a Community of Shared Future for Mankind”

In 2018, after pulling out of JCPOA, the US reinstated its sanctions on Iran on the following sectors:  energy, shipping and financial sectors. The sanction banned the US companies from not only trading with Iran, but also with foreign firms or countries that were dealing with Iran. China responded by criticizing the US for its “unilateral sanctions” and “bullying”.   It even defied the US sanctions and continued buying oil from Iran. Defying the US sanctions, China continues to buy Iranian oil. Nevertheless, China’s response has been more than a mere lip service.  It has been constantly advocating the significance of multilateralism as a way to manage political as well as economic matters.

With regards Qasem Soleimani, the killing of the General who headed the Elite Quds Force of IRGC in an airstrike carried out by the US forces has led to criticism of the US by various states. US had earlier designated Iran’s Islamic Revolutionary Guard Corps (IRGC), including its Quds Force, as a Foreign Terrorist Organization (FTO). Responding with a call to maintain restraint by all parties involved in the incident, China singled out the US “for violating international norms”. The US killed Qasem Soleimani, a uniformed personnel of IRGC travelling in a flagged car in a sovereign third party state, which hosts US forces. Killing of Qasem Soleimani by the US forces has raised questions on the legality of the US’s actions. According to UN charter, unless the purpose for using force is an act of self-defense or to prevent an imminent attack on US interest or US forces, the US is prohibited from using force in or against any other nation without UN’s authorization. In case of self-defense, attack killing Qasem Soleimani will be lawful under Article 51 of the UN charter. The killing of Qasem Soleimani would have been lawful under Article 51 of the UN Charter as an act of self-defense. Though, Mike Pompeo, Secretary of State has claimed that self-defense led to the killing of Qasem Soleimani, US has not been able to provide the evidence of the same in front of UNSC.

Domestic Impact of US-Iran conflict on China

 Escalation of conflicts in the Middle East could lead to rise in the prices of oil, thereby, severely affecting China’s economy. China’s economy is heavily dependent on oil imports.  China is the world’s largest importer of crude oil (US$ 239.2 billion in 2019). Among the top 15 largest exporters of crude oil to China 7 countries belong to the Middle East.  Moreover, Middle East is also an important part of China’s Maritime Silk Road Initiative (MSRI). Most vessels transporting goods, including oil, between China and Europe must pass through several choke points in the Middle East for e.g. up to one third of crude oil shipped over sea has to transit through the Strait of Hormuz, off the coast of Iran and the United Arab Emirates (UAE)

The BRI and China’s economic growth both are major factors undergirding CCP’s legitimacy at home. Until China finds an alternative to its energy supplies, a stable Middle East would be more favorable to China than an unstable one.

Impact on the International Stage

The US along with some other western powers, had set up the current framework for international law and norms after WW II. While it worked in favor of the Western powers earlier. Today, as China adopts the ‘going out’ policy, it has been largely benefitting China.

On Killing of Qasem Soleimani, China responded by saying “The sovereignty and territorial integrity of Iraq should be respected, and peace and stability in the Middle East and the Gulf should be maintained” further, it Chinese authorities also stated, “We urge all parties concerned, especially the United States, to maintain calm and restraint and to avoid the further escalation of tension.”

China’s role in the Middle East has been a strategic one, unlike the US it does not have any permanent enemy or an ‘all weather friend’ in the region. China’s role in the Middle East has been that of a regional leader where it has brought the conflicting parties to hold talks with an aim of peacefully resolving the crisis situations.  It also remains cautious about not being engaged in the conflict. China’s geographical distance also helps to maintain a distance from the region to a considerable extent, China also remains careful to merely criticize the US without taking any concrete action that can go against its own interest and derail the trade negotiation talks. However, if the US continues with its misadventure, China will also be able to legitimize its criticism over US meddling in the internal affairs of other countries.

The escalation in US-Iran conflict coincides with the US-China trade war. China has always been highlighting the political nature of the trade war. President Trump’s policies in the Middle East and especially vis-à-vis Iran  has paved the way for China’s intervention in the Middle East which has benefited China in at least two areas – , the assurance of continuous energy supply within a system that is beneficial for China and  the opportunity to ratify itself as a world leader. On one hand China defied the US’s sanctions and continued to import Iranian oil, which establishes China as a leader. Meanwhile it remains practical to look for other sources of energy, which secures its long term plan as Iranian oil export to China is decreasing.

Natuna Crisis: Is South China Sea a Fisheries Dispute?

Mahesh Kumar Kamtam, Research Intern, ICS

The recent crisis in the South China Sea erupted in December 2019, when a group of nearly 30 Chinese fishing vessels, accompanied by the Chinese Coast Guards (CCG) intruded the “exclusive economic zone” (EEZ) of Indonesia around the Natuna Islands, a part of the sovereign rights guaranteed by the “United Nations Convention on the Law of the Sea” (UNCLOS). China’s aggressive posturing in the South China Sea, accompanied by its large fleet of fishing vessels and maritime militia, brings new challenges to the region and the sustainability of South China Sea.

South China Sea has been at the centre of dispute since China began asserting its sovereignty over the entire sea as part of its historical claim of the “nine-dash line”. This claim not only makes it an expansionist power but presents a challenge to the sovereignty of the neighbouring coastal states with overlapping jurisdiction (see the map below). The Natuna crisis and China’s aggressive postures has irked the eye of many ASEAN member states. Nevertheless, I would argue that the crisis presents not only a security threat for the neighbouring coastal states but also challenges the sustainability of the entire South China Sea ecosystem.

South China Sea Ecosystem

Source: South China Morning Post

The South China Sea dispute must be viewed from the perspective of fisheries development and the conflict for fishing grounds in the region.  A report by the Centre for Strategic International studies (CSIS) has shown that the region is dangerously overfished and over-capacitated with the fishing boats. For instance, the report cites a paradoxically worrying trend with South China Sea accounting for 12% of the global fisheries and more than 50% of the gross fishing boats of the world present in the region. Synthetic Aperture Radar (SAR) images captured by Asia Maritime Initiative depict this trend in the region (see image below). This shows that there is sheer overcapacity in the region in terms of fishing which has further led to aggressive behavioural tactics by countries involved in the South China Sea dispute.

SAR images

          Source: White Shipping Data, Asia Maritime Initiative

Tactics to intimidate the fishing community are adopted frequently by the CCG in the region to deter the non-Chinese fishers from fishing in the South China Sea region. Chinese fishermen, with the support of CCG and Chinese Navy, have also displayed aggressive behaviour in the cross-fishing activities in the disputed waters. One of their tactics includes ramming foreign boats and sinking them. For instance, a Filipino boat was sunk by the Chinese fishermen leaving 30 Filipino sailors at the mercy of others for rescue. Gregory Poling, Director of Asia Maritime Initiative describes this approach as a “constant exercise of low-intensity warfare”.

The Natuna crisis comes in the context of the departure of Indonesia’s Minister for Maritime Affairs and Fisheries, Susi Pudjiastuti, whohas a strong track record of adopting tough policies on the protection of ocean ecosystem and the crackdown on illegal fishing activity in the Indonesian waters. With the departure of Susi, China is probably testing Indonesia’s ability to confront CCGs in the Natuna Sea. However, it is also aware that Indonesia stands as the fulcrum that connects the Pacific and the Indian Ocean. Therefore, it is seeking not to escalate the dispute further which can lead to a “crisis situation” in the region. Moreover, Indonesia has no conflicting claims in the South China Sea, unlike its neighbours.

China has for long claimed sovereignty over the entire South China Sea by arguing that “it is part of Chinese historic traditional fishing grounds” and expanded its naval presence through aggressive tactics. The Chinese Navy and the CCG are at the forefront by providing security and accompanying the Chinese fishing vessels, survey ships, and other mineral exploration activities in the South China Sea. Nevertheless, these activities are not confined to the “traditional fishing grounds” alone. Chinese ships have often crossed the established “nine-dash line” to either assert their control over fishing grounds by driving out foreign fishers or to test the neighbouring states’ potential and their capabilities in handling the crisis in a “matured” manner. Both the tactics are working in China’s favour to steadily extend its influence in the region.

Chinese activities in the South China Sea have expanded in the recent past with an expansive military build-up, transforming the “ecologically fragile coral reefs” into a military outpost in order to establish their continuous presence in the region as a strong naval power. The modernization of the Chinese Navy and the inclusion of the indigenously built aircraft carrier, “Shandong” is an example of China’s growing capabilities in the region and its quest to become a “naval superpower”. Nevertheless, the disrespect for international laws and non-compliance with international norms can have possible implications not just for the maritime security in the region but also severely affects the livelihood of fishing communities who are solely dependent upon the ocean resources. The data compiled on the marine fishery production in the region by the Pearson Institute of International Economics shows dangerous levels of fishing activity in the region (see graph below). The Chinese fisheries community along the coast, being overwhelming dependent on fishing as their sole occupation, has put China in a compelling position to venture into the extra-territorial waters of other countries.

Fishing activity in the region

    Source: Pearson Institute of International Economics

So, where are we heading towards in the South China Sea dispute? It seems, for the time being, China is trying to carve out its extra-territorial geographical expansion through a multi-prolonged strategy, with CCG and fisheries at the forefront of China’s expansionist agenda. However, the military escalation and the disturbance to the ecological fragility in the region may bring many livelihoods to standstill, ultimately affecting the region’s ecology and economy alike. This presents a long-term challenge to the region that risks human security at the cost of national security. Countries in the region and especially China, should be cognizant of the consequences that follow. Therefore, countries need to redefine the concept of security in the context of growing livelihood challenges.

Challenging International Norms: Chinese Censorship Model Goes Global

This self-censorship would leave no room for a dialogue or interaction to take place over contested issues if people and states choose not to voice their opinions.

Adveetya Kachiar: Research Assistant, Institute of Chinese Studies


Image Source: Wall Street Journal

Article 19 of the Universal Declaration of Human Rights protects the right to freedom of speech and expression, including the freedom to hold opinions without interference. The right is protected under many treatises such as the International Covenant on Civil and Political Rights, and ratified by an overwhelming majority of the countries, making it an international norm. In an emerging trend, China is increasingly leveraging its vast consumer market, especially the recent technological advancements in the areas of 5G and AI, to force businesses and states either to co-opt with its worldview or lose out of the race. The censorship model within China is well-known: by managing the discourse and curbing the flow of information, the party ensures its survival and maintains its hold over the system, which is to say, the CCP decides on what can and cannot be talked about in the country. However, the expansion of this model outside China is rather new. Under its global campaign of telling ‘the Chinese story well’, the party-state has increased its efforts to control the narrative of its perceptions outside its borders. The censorship model working at various levels targets businesses, states, academia, and cultural spaces, whose views are not in line with the state’s discourse.

In October 2019, Daryl Morey, the General Manager of Houston Rockets of the National Basketball Association (NBA) tweeted an image supporting the ongoing protests in Hong Kong, causing a huge outrage on social media platforms like Weibo. The tweet almost jeopardized the $500 million market that NBA is trying to establish in the country. Following a major backlash from the Chinese media and nationalists, both CCTV, NBA’s broadcasting partner and Tencent, its streaming partner, canceled the broadcast of the pre-seasons game.  Consequentially, the NBA gave a statement apologizing to the Chinese people for hurting their sentiments and expressing the respect for the sovereignty and territorial integrity of China.

In their apologies, companies and people such as Daimler, owner of Mercedes, have ended up using the phrase ‘hurting the sentiments of the Chinese people’. It is important to understand that the backlash does not come mainly for the government but also from the Chinese people on social media who see themselves as victims of ‘centuries of humiliation’ by the outside forces. Florian Schneider describes ‘National humiliation’ as the underlying idea around which most of the social media outrage/debate is taking place in the country. The Chinese government then benefitting from this nationalism can continue to have relations with states or businesses, but on its own terms. Due to the asymmetry of information in China, where the government has most of the control over information flow, the businesses are constrained to show their side of the story or reach out to the Chinese public.

Dreading the backlash, corporations and people are now apprehensive about voicing their opinions. Even on American soil, the fear of losing access to the Chinese market and the related risk of financial loss, forces people to stay silent, thereby, do self-censorship. Major movie-making giants, such as Disney, have chosen to accommodate Chinese demands such as removing the Tibetan origins of the character ‘Ancient One’ from their movie Doctor Strange, in return of access to the world’s second largest economy. Even in Academia, according to interviews with professors, students and administrators, many graduates had admitted to self-censorship and choosing not to be overly-political that might threaten their ability to get a visa to China. Samantha Hoffmann argues that, if businesses continue to adhere to the Chinese demands, self-censorship would ultimately become a mechanical decision by the companies, creating a new international norm, threatening the sovereignty of other nations and challenging the values on which the liberal world order operates. This self-censorship would leave no room for a dialogue or interaction to take place over contested issues if people and states choose not to voice their opinions.

Increasingly, many nation-states are also adopting the norm of self-censorship. This trend is especially visible in the EU-member states, avowed proponents of liberal values such as democracy, human rights, freedom of expression and the rule of law. States are now willing to make concessions to the Chinese government either because of fear or to curry favor. The normalization of relation between China and Norway in 2016 is one such example, where Norway, distanced itself from the Chinese political activist Liu Xiaobo after he was awarded the Nobel Peace Prize in 2010 resulting in freezing of the relations. Ever since then, Norway has tried to mend its relations with China by helping it gain observer status in the Arctic Council, and also refusing to meet the Dalai Lama in 2014. According to a report by the European Think-Tank Network on China, a trend is emerging in Europe where states are downgrading the emphasis on political values while dealing with China.

However, there has been a pushback against the Chinese campaign, for example, Sweden rejecting the threats from China after awarding a freedom of speech prize to the Chinese-Swedish scholar, Gui Minhai, and Google terminating its Dragonfly project, a prototype censored search engine which could be used to monitor people’s behavior online. However, such options are not available to smaller powers that are much more dependent on China. State and corporations have to choose between their commitment to the values of freedom of expression or taking the path of least resistance. One must realize that China has risen in an environment of unprecedented levels of interconnectedness and interdependence, and that it is not only the world that needs China, but China also needs the world.

BRI through India? An Idea that Still Stays Grounded

P.K.Anand, Research Associate, ICS

When an idea grips the masses, it becomes a material force – Karl Marx

German philosopher and political theorist Karl Marx’s quote depicts the power of ideas and how, if other factors remaining stable and equal, the value of ideas to generate transformation is very potent.

However, in the world of policy-making, ideas are not mere abstract concepts; in its germination from a seed to reach full fruition, they often have to navigate through the thick architecture of systems, structures and processes. Mostly, the shape of the ideas would have been altered significantly, to the extent they might even be indistinguishable. If this is the story with ideas that have potential traction, what about those which are yet to even lift off the ground, or even be difficult to execute due to systemic, and political-economic constraints?

Bharatiya Janata Party (BJP) leader Subramanian Swamy’s recent suggestion of getting the Chinese to redirect their Belt and Road Initiative (BRI) through Mumbai and Kolkata ports falls into the latter category — incoherent, and without attention to details. In domestic politics, Swamy’s extreme Right-wing opinions and verbose are often ignored by his party and the Union government. However, on this count, he attempts to indicate seriousness to his idea, by indicating the apparent affirmation of the Chinese leadership.

Juxtaposed with the concrete realities on the ground, it is doubtful that his signalling would get across to the intended sections in the government. This is largely due to the avowed opposition of the Indian government on the BRI though it is yet to come out with a concrete, well-articulated response to the initiative or offer a credible and tangible alternative. Rather, oft-handed comments and terse statements are all that are available for analysts to parse through to understand the official position.

If one were to build a macro picture going by those comments as well as looking at the Chinese assertiveness, the non-transparency in most of the projects and increasing contrarian voices on the BRI from some of the participant countries, it is difficult to imagine that merely keeping out of Pakistan occupied Kashmir (PoK) would resolve the issue.

As a rising power, India aspires to play an equally enhanced leadership role in the world and, therefore, competition with China is inevitable, at multiple levels. In this context, any involvement in the BRI with next to no control on the narrative would be perceived as playing second fiddle. Furthermore, the China-Pakistan Economic Corridor (CPEC), even with all its fragilities, is now moving to the second phase and therefore, the chances of Beijing revising its position are slim.

Swamy’s comments on the Mumbai and Kolkata ports — though BRI is not only about transportation and movement of goods but also infrastructural expansion — provides the opportunity to highlight the pressing concern of weak infrastructural capacities in India. In the hypothetical possibility of flow of goods through both the ports, the (in)capacities in the form of human and material resources, ill-equipped mechanisms, and red-tape, remain plaguing issues and cast serious doubts on preparedness. Given that the Chinese also like to put the money where the mouth is, absence of enhanced basic infrastructure will discourage potential investments.

The lack of resources and structural constraints brings to the fore the critical question of State capacity, or why, despite having high population and economic growth around same levels, China was more responsive than India in distributing resources and directing development? The high degree of organisational capacity of the Chinese State being under one-party rule notwithstanding — and thereby looking beyond the simplistic notion of type of regimes, or multi-party democracy vs one-party State — the key to the answer might lie in India’s weak public institutions.The inability of the State to perform the functions of economic and social development due to constraints of societal rifts or administrative barriers negatively impacts the people. The ongoing churning on ideas of belonging and citizenship has only exacerbated the lack of faith and trust in institutions, questioning their efficacy and effectiveness.

Clearly, material force, and concrete conditions, are key factors in actualising ideas.

Originally published as Why BRI through India is wishful thinking at best in Moneycontrol.com, 23 January 2020

‘PRC Scholars React to India’s Contentious Kashmir Move’: An Analysis

One expert said that “Kashmir war escalation shows that India is a rogue state.”

Dr. Hemant Adlakha, Honorary Fellow, Institute of Chinese Studies; Associate Professor, Centre for Chinese & South East Asian Studies, Jawaharlal Nehru University

Scholars in the P R China have reacted quickly and sharply to the Indian government’s sudden decision to remove Kashmir’s special status under Article 370 and reorganize the state into two centrally governed territories – Jammu and Kashmir being one, Ladakh the other.  In the views of most Chinese experts, India’s ‘unilateral’ move is not only ‘irresponsible and is source of tension in one of the most complex border disputes in the region’ but it (the Indian move on Kashmir) has the potential to ‘seriously derail’ the recent consensus arrived at between the president Xi Jinping and prime minister Narendra Modi.

Echoing Beijing’s official position on the status of the state of Jammu & Kashmir, the scholarly commentaries too describe the Kashmir region as internationally acknowledged disputed area between India and Pakistan; as also established in the 13 August, 1948 UNSC Resolution, 5 January, 1949 UN Resolution on India Pakistan Commission, and 1972 Simla Agreement etc. respectively.   

Interestingly, in sharp contrast with the section of the Indian English language national media – both the print and electronic – reports last Tuesday that “India and China (on Monday) seemed to have stepped back from allowing Kashmir to become an unmanageable irritant between the two countries,” just as the visiting Indian foreign minister, Mr. S. Jaishankar was holding talks with his counterpart in Beijing, op-ed columns in the mainstream Chinese media were screaming out with contradictory tones. Take a look at the sample: “As India scraps Kashmir’s special status, Pakistan’s dream lies shattered,” “India Revoking Kashmir Special Status is Violation of China’s Sovereignty: Don’t Expect Beijing to sit by idly,” “China will Never Let India’s Kashmir Power Grab Succeed.”

In addition, even as the Indian EAM was shaking hands with the Chinese vice president, Wang Qishan, a researcher at the Shanghai Institute of International Studies, SIIS, Mr. Liu Zongyi wrote in a signed syndicated column, “Due to India’s classification of Ladakh as a centrally administered area, the territory of the region, which was occupied by India in the western sector of the Sino-Indian border, will also have an impact on the stability of Sino-Indian relations.” Mr. Liu Zongyi also dons the position of a visiting research fellow at the Renmin University of China’s Chongyang Institute, an influential Beijing think tank on foreign affairs issues.

In another signed article on the same day, a Chinese scholar argued that India’s arrogant action has posed an increased security risk to the LAC in the western sector along the boundary between China and India. “China immediately and firmly opposed (India’s Kashmir move) not only because the Indian arrogant action will exacerbate regional tensions and pose a threat to China’s peripheral security, but also because the Indian action will render the LAC along the western sector of the boundary between the two countries increasingly vulnerable.” In the wild Indian imagination, the composition of the so-called Kashmir region includes the IOK – which includes Jammu, the Kashmir Valley, Baltistan and the China’s native land of Ladakh; the POK, the Chinese Aksai Chin as well as the Demchok region to the west of Aksai Chin – currently under dispute, the article claimed.    

Several Chinese commentaries view the controversial unilateral Indian push to change Kashmir’s status is aimed at fulfilling Modi government’s Hindu nationalist agenda. According to Liu Zongyi, “the Bhartiya Janta Party and its parent organization the Rashtriya Swayamsevak Sangh have always believed India has been at the forefront of resisting the Muslim invasion for 1300 years. The revocation of the Kashmir special status is the successful accomplishment of the BJP/RSS political agenda, i e, to strengthen Indian control over Kashmir, to alter Kashmir’s demographic nature, and to fully integrate it into the Union of India.”

The article, which first appeared on the Chongyang Institute website on August 12 and was quickly picked up by various Chinese news portals claims, the Kashmir move had been hatched based on a well-synchronized strategy, with keeping in mind both national as well as international factors. Speaking of the internal factors, the article contends that the Modi government wanted to fulfil its election promises to integrate Kashmir with India, which it had failed to implement during the previous five years on account of lack of majority in the Indian parliament. Likewise, several other Chinese commentators too have interpreted the parliamentary move on 5 August as an attempt by Modi, emboldened by the recent election victory, to have greater control over Kashmir, India’s only Muslim-majority state and the main source of conflict between India and Pakistan.

On the other hand, the external factor which largely contributed to the timing of the Kashmir move was the rapid progress achieved by the US and Taliban recently. Leaving India not only marginalized and isolated in the renewed Afghan peace process but also pushing India face the risk of losing initiative on both Afghanistan and Kashmir vis-à-vis Pakistan.  Besides, Chinese commentators over time have been highlighting India desperately trying to win over the US support to isolate Pakistan/Taliban in order to strengthen control over the entire Kashmir region. It is in this context these experts see a close link behind the Indian unilateral action in Kashmir to two more possible external reasons: to alert as well as draw the US attention to the fact that India alone has the right to determine what goes on in Jammu & Kashmir; and that India will not tolerate Pakistan to make use of the Taliban militants to unleash terrorism in Kashmir.

Furthermore, typically least surprising, not one Chinese commentary so far has voiced concerns such as total clampdown on democracy in Kashmir, closing down of schools, tourists evacuation, cutting off internet connectivity, and putting some of the local political leaders under house arrest etc.; on the other hand, what is also noticeably absent in the Chinese commentaries are the worldwide heightened concerns of both India and Pakistan being the nuclear weapon possessing neighbours. Neither China’s leaders nor the experts/scholars have indicated worrying signs that any escalation might push the two South Asian hostile neighbours ‘over the edge’ and start a conventional war that might well grow into a full-on nuclear conflict. 

Finally, as already mentioned, the Chinese concerns are largely centred on how Pakistan is going to equip itself both diplomatically and otherwise to successfully thwart off the arrogant Indian move in Kashmir; whether the immediate counter measures the Imran Khan government has announced would exercise any impact on India – measures such as to downgrade diplomatic relations, to cut off economic and trade ties, to put a ban on the Indian movies, to deny air space access over Pakistan to the Indian air flights and so on. A few Chinese scholars did however warn India of serious consequences of carrying out ‘aggression’ over the Chinese sovereign areas in the so-called Union Territory of Ladakh. Likening India’s highly contentious move in Kashmir to the behaviour of a rogue state, one commentator questioned: India has been dreaming of becoming a UNSC permanent member, does India aim to achieve this by deliberately violating the UNSC Resolutions and by trampling on the authority of the UN and the Security Council?

Hong Kong: A Fight Against Subordination

The present mass opposition and upheaval against a proposed extradition law by Chief Executive Carrie Lam, is driven by the same factor. But, this time precious rights and freedoms guaranteed under “one country, two systems” are at stake.

Sanjana Dhar, Research Intern, Institute of Chinese Studies, Delhi

Hong Kongers are known for mass protests whenever they have been pushed to a corner by their government. The present mass opposition and upheaval against a proposed extradition law by Chief Executive Carrie Lam, is driven by the same factor. But, this time precious rights and freedoms guaranteed under “one country, two systems” are at stake.

The Fugitive Offenders and Mutual Legislation (Amendment) Bill 2019, or the Extradition law of Hong Kong has garnered widespread attention. The proposed law deals with the extradition of fugitives from Hong Kong to Taiwan, Macau and mainland China. It was initiated by Carrie Lam in February 2019 and the motivation for it was due to a murder case, where a man from Hong Kong murdered his girlfriend in Taiwan and fled back home. Extradition requests made by Taiwanese officials could not be carried forward due to the absence of an extradition treaty between Hong Kong and Taiwan. Carrie Lam proposed this law in the hopes of filling a “legal loophole” because without a prior treaty in place, extradition cannot be carried out. With the formulation of a new extradition treaty, criminals cannot evade punishments for crimes committed in a different country.

The present situation of mass protests in Hong Kong is driven by the fact that the extradition law will give Beijing more leeway in matters of suppressing democracy and freedom in Hong Kong. Central authorities could arbitrarily arrest individuals who oppose their authority and bring them to justice under the opaque and politicised judicial system in the mainland. This is in contrast with the judicial system in Hong Kong, which is guided by rule of law. Beijing’s overbearing involvement in Hong Kong is in contradiction to the “one country, two systems” policy, which allows Hong Kong to maintain its partial democracy and free market within the territory of China. Fear of erosion of this policy has shaken the minds of the public and they are choosing to express this fear in the form of fierce protests.

Amidst popular discontent for the law, Carrie Lam initially had a strong position and vouched that the proposed law would in no way compromise human rights principles of Hong Kong. The final say in the granting of extradition requests would rest with Hong Kong and religious and political matters would be kept out of the purview. Yet, growing public dissatisfaction against the bill has undermined her image and created demands for her resignation.

The mass protests of 9 and 12 June is evidence of the dissatisfaction among Hong Kong citizens with the turn of events. It is testimony that Hong Kongers are ready for what has been touted as the “last fight” for safeguarding their democracy and freedom.

The protests on 12 June gave the people a temporary relief as the second round of discussions of the bill was cancelled due to blockades by protesters near the government headquarters. However, the protests took an unprecedented turn as the police used tear gas and fired rubber bullets at the protesters. Media outlets have dubbed it as violence which has never been witnessed in the history of Hong Kong and the police force is being held accountable by the public for such a blatant act. Rising protests after such violence has forced Carrie Lam to suspend discussions on the law indefinitely. Her apology for the negligence on her part in involving the opinions of the society in making the law and expediting the passing of the law at the cost of peace in Hong Kong has brought temporary relief, but the people do not intend to stop until the bill is entirely withdrawn.

Undoubtedly, these events have drawn the attention of the international community. Leaders all over the world have come out in support of the anti-extradition protests and voiced their concerns of Hong Kong transforming into an illiberal region, not suitable for its once reputed liberal, market oriented society. Multiple rallies have taken place worldwide in support of the protesters. Hong Kongers have also urged foreign leaders to discuss the situation in the G-20 Summit and back demands of withdrawal of the bill.

China is at the center of this issue, although its direct involvement in the matter is not clear. Regardless, Chinese foreign ministry spokesman, Geng Shuang initially came out in full support of the administration in Hong Kong. Beijing believed the involvement of “foreign forces” was aggravating the situation and filling the public with animosity towards the law, which would not jeopardise the rule of law and justice in Hong Kong. But Beijing has now backtracked and is in support of the suspension of the bill.

The shift in Beijing’s stance reflects the precarious condition China is presently in, due to the trade war with the USA and the slowing economy. Can Xi Jinping afford to counter the situation in Hong Kong through force and add another tragedy in China’s history or could the protests in Hong Kong further attenuate Beijing’s vulnerabilities, are some of the questions which are yet to be answered. But at the moment, Hong Kongers seem to have gotten the better of Beijing.

The black clad protests of 16 June of nearly two million people sent a strong message to the administration over the people’s demands of complete withdrawal of the bill. Protesters won’t be satisfied only with the suspension of the bill because they speculate the administration will bring back discussions once the protesters have calmed down.

The situation in Hong Kong demonstrates the resolution of the protesters and their concerns about erosion of the “one country two systems” and its eventual merging with the system present in mainland China. Fierce resistance of the people is not just against the extradition law, but this upheaval is critical for Hong Kongers to safeguard their prized rights and freedoms in the face of arbitrariness and subordination from Beijing.

Agricultural Industry amidst the 2018 US-China Trade War

This article discusses the current scenario of the two markets, with a particular focus on soybeans and associated businesses.

VIDUSHI R SINGH, Research Intern, Institute of Chinese Studies

The US-China trade war of 2018 began with tariffs being imposed on core sectors, such as industry inputs (steel, aluminium tariffs by the US) and agriculture (grain and seed tariffs by China). These attacks on primary industries have led to huge outcries on both sides, with several calls for the hurrying up of ongoing trade negotiations so that the political agendas of the leaders do not hurt the ordinary people.

This article discusses the current scenario of the two markets, with a particular focus on soybeans and associated businesses. Both countries have faced losses and market instability as a result of tariffs being put on agricultural commodities this manoeuvre, but while neither of the countries have ‘won’ in this particular sector, China seems to have incurred a lesser loss than the US.

US Agricultural Industry

The first round of the trade war saw China putting a 25 per cent retaliatory tariff on several US goods. One of the most critical commodities in the Chinese list was soybean – produced in regions that were majority supporters of Trump in 2016. The cleverly targeted tariffs have wreaked havoc on the US soybean market, with prices falling by over 13.4 per cent (based on the author’s calculations and data from United States Department of Agriculture) since May 2018. The fall in prices has further been caused by an approximate 78.6 per cent fall in demand from Chinese importers as of April 2019, based on a year on year comparison. The trade negotiations between President Trump and President Xi have included promises by the Chinese government regarding buying of over 5 million tonnes of soybean from the US, but no deadline has been set. It is possible that the unreliability of the US as a supplier of essential commodities to China has encouraged the Chinese populace to look for substitutes elsewhere, and US farmers are unlikely to have the same access to the Chinese market as they once enjoyed. As of now, there has been an almost complete crowding out of US soybean from the Chinese market, due to its inability to compete with local and Brazilian substitutes on prices. If the Chinese tariffs stay in place, the USDA projections have concluded that US soybean exports will not be able to reach pre-trade war levels even by 2024.

Another factor creating problems for the US agriculture industry is the increased costs of farm equipment and machinery. The tariffs on steel and aluminium imposed by Trump have led to a rise in the production costs of farm machinery. This, combined with the low expectations farmers have for the coming planting seasons, has resulted in a situation where farmer bankruptcies are on the rise, and US agricultural trade surplus has hit an unprecedented low, the lowest it has been since 2007. The plantation of soybean has fallen by 5 per cent in the last one year and is anticipated to reduce further, as farmers move away from soybean to other, more profitable crops. While the US Department of Agriculture has promised aid to farmers adding up to USD 12 billion, they have also asserted that this will only be a one-time assistance to help farmers regain control of farm operations.

Chinese Agricultural Industry

As for the Chinese side of the agriculture industry, the scenario seems to be mixed, as opposed to the blatantly negative situation that the US agricultural industry is facing.

The Central Committee of the Communist Party of China and the State Council unveiled its Number 1 Agricultural Document on 19 February 2019. The document focused on agricultural and rural issues and outlined policy goals for 2019 and 2020. Its focus on the “profound changes in the external environment” and ways to mitigate the same highlights China’s wariness with regards to the rising tensions in the trade war. This announcement falls in line with China’s 2015 mission to achieve absolute food security by balancing production and environmental concerns. While the agricultural reforms and the shift to the household responsibility system have helped increase productivity of land, China’s reliability on foreign markets for soybean has become a cause of concern, bringing down the agricultural trade balance, which would otherwise have been positive.

The government has, however, acted commendably fast in the past year to shift all soybean imports from the US to Brazil, which has allowed Chinese consumers some protection from the increased prices of US soybean. This has been followed by government encouragement of increased domestic production of soybean and other feed grains. However, the lower profitability of cultivation of soybean over rice or wheat has created a new need for subsidy and minimum procurement schemes.

Another factor cushioning Chinese soybean market has been the outbreak of African swine fever in various parts of the country since August 2018. The hog population in China has fallen by an estimated 13 per cent, and this has created a consequential fall in demand for feed grains and seeds. Since swine feed in China is 20 per cent composed of soybeans, this fall in demand has allowed for market prices to stabilize at a lower level than previously anticipated.

These steps have also been accompanied by reduced quality restrictions on imports and increased incentivisation for agricultural investment, as announced in the latest Number 1 document. So while there has been an undeniable fall in supply and increased uncertainty in the market, the government’s response has been able to prevent the need for total abstention from the consumption of soybean and several other vital parts of people’s diets as well as livestock feed.

Conclusion

The attempts by the two countries to regain equilibrium in their respective agricultural markets have provided some comfort to the consumers and producers of the tariffed products. The Chinese government, however, seems to have leveraged its position better to create changes very quickly to shield its populace from the worst impacts of the trade war. The US government, on the other hand, has only implemented superficial steps to manage the impact of the trade war in its borders, instead choosing to leave the outcome to market forces.

Irrespective of these safeguarding attempts by the governments, the agricultural markets in both countries are doing worse than previous financial years. Falling demands and accumulating stocks have created an imbalance in the global market. In the absence of intervention, this may result in an economic crash, as US farmers find themselves unable to repay loans and Chinese livestock producers fall short of sufficiently nutritious feed. Relaxing quality controls and giving out aids are sure to help in the short run; however, given the inconsistencies in the market, long-term solutions are necessary.

The State of China’s Automobile Sector

Amidst the uncertainty regarding the trade war’s impact on Chinese industry, the automobile sector in China will remain profitable

Bhavana Giri, Research Intern, Institute of Chinese Studies

Photo: Visual China

Automobile sector in China is the largest in the world when measured by the number of units produced. Apart from domestic production, people’s demands for all kinds of vehicles in China are met by Joint Ventures (JV). For a foreign company to establish a JV, it is required to enter into a 50-50 partnership with a Chinese company in order to start production in China; a similar arrangement is required for foreign companies to export automobiles to China.

Automobiles from the US are one of the most significant exports to China, ranking just behind aircraft and agricultural output. With a trade value of more than $10 billion, this sector is of great significance to the ongoing trade war. Currently, the automobile sector in China is witnessing a downfall in output growth when taken as whole which is driven by a drop in the production of gasoline based automobiles. However, in the long run, China’s drive to lead in global production of new energy vehicles (NEVs) is slated to offset this downturn, even if the trade war continues. Additionally, the upper hand China has in the automobile joint ventures will also help to recover from the downfall. In contrast, the resilience of China’s NEV sector will adversely impact the competitiveness of its American counterpart.

Demand side conditions are highly favourable and will continue to be so. Three decades ago bicycles were the most popular mode of transport in China and most cars needed to be imported. Today, however, Chinese car makers are producing more cars than any other country in absolute terms. As can be seen from the data, the production of automobile in China increased from 9 million units in 2007 to 23 million in 2018. To be sure, economic conditions are currently turbulent in China.

Observers predict that China’s GDP will decelerate in the near future and its leaders have urged precaution in this regard. The automobile sector, however is poised to remain buoyant, despite macroeconomic woes. The Chinese government intends to prioritise the preservation of automobile demand and supply by providing subsidies and exempting consumers from purchase tax on electric vehicles. These subsidies will ensure that there will be no significant shock to the automobile sector.

China has become the biggest giant in the production of electric cars and bikes. With Domestic Value Addition (DVA) of more than 80 per cent, and a strong grip over the production of essential inputs such as batteries, the sector enjoys a substantially strong footing. Recent falls in automobile stock prices should not obscure this fact.

To the rest of the world, it may appear that China has struggled to make progress in automobile manufacturing. However, the situation has changed drastically with recent developments. China now possesses massive potential for substituting imported automobiles with electric vehicles. With trade talks in a state of disarray and the heightened possibility that China will reapply auto tariffs, it is also likely that automakers will be incentivised further to produce in China. With the exception of the luxury segment, which is less easily substituted, China’s automobile sector is likely to withstand the headwinds it currently faces. Moreover, with the Chinese government establishing stricter norms for controlling carbon emissions and attempting to reduce pollution in cities, the scope for domestic companies to defeat automobile giants such as Toyota, BMW, etc has escalated. The Chinese government is also granting special manufacturing permits to companies which are working to develop NEVs.

The electric vehicle world sales database shows that in 2018, 2.1 million units of electric vehicles were sold which is almost 64 per cent higher than that of 2017. China has advanced its position in this particular segment and has a share of almost 56 per cent of the total sales. Although companies like Tesla, Toyota, etc. are also developing electric vehicles they lack the cost advantage China has, and are, thus unable to capture the market. Several subsidies and tax cuts provided on purchases of electric vehicles further boost demand in the highly populated cities of China. This is illustrated by the fact that profits for BYD jumped 632 per cent jump in 2019. On the other hand Tesla, which is exporting to China in an increasingly hostile trade environment, lost nearly $700 million in the first quarter in 2019, despite robust demand.

Another factor that will support China’s automobile sector is technology transfer. Most automobile production in China happens by way of Joint Ventures (JV) between Chinese and foreign companies, which allows local companies to acquire know-how. The Chinese have also acquired automobile technology by heavily investing in foreign-based automobile companies. Therefore, China’s automobile sector is unlikely to reel in the long-run. Moreover, China is less dependent on foreign value addition than it used to be – its contribution to processing and non-processing value addition process in the production of automobiles is uninterruptedly increasing.

The optimism expressed above does not apply to the American automobile industry, however. To a large extent, US-based automobile companies are dependent on revenues from the Chinese market that their JVs enjoy and are, thus, highly vulnerable to disruptions in bilateral relationship between two nations. For example, automobile giant BMW, is not introducing a new model because of the environment of uncertainty created by the trade war. US automobile companies are experiencing sluggish production while on the other hand Chinese NEV start-ups and companies are scaling up their production.

Unlike others, the automobile sector in China will likely remain profitable irrespective of ongoing trade contestations and tensions, due to the Chinese government’s encouragement to develop NEVs. China’s NEV companies are poised to emerge as leaders in markets all around the world, as they race ahead their counterparts from the US, Japan, and Germany.

China, Global Capitalism and the Future World Order

How reflections on Marxism, history and contemporary politics envision the future of the capitalist world order.

Vidushi R Singh, Research Intern, Institute of Chinese Studies

The reform and opening up of China in 1978 paved the way for the transformation of China from a planned to a socialist market economy. The decision to open up the economy was criticized by many leftist academics and economists. The reforms led to major disagreements between the government and the bourgeois elites.

Today, under Xi Jinping’s rule, the CPC is debating the direction of growth which China should continue pursuing. In light of the US-China trade war, the calls for China to become a true market economy have reached a crescendo. Despite that, the rest of the world is shifting away from free market operations towards protectionism, with the Nordic model[1] of state-market balancing gaining immense appreciation. At a time like this, Lin Chun’s book, China and Global Capitalism: Reflections on Marxism, History and Contemporary Politics,[2] provides a critical perspective on how one can interpret the changing global scenario while considering the domestic realities of China.

The main thesis of the book questions the sustainability and moral desirability of capitalism in China and the world with regard to the evolving world order. Lin Chun attempts to decipher the past and present of the global capitalist order and its interactions with China, with a continuous call for China to revert to the pre-reform era. She ends the book by predicting the eventual and inevitable transformation of the global order into a ‘moral socialist economy’ (p. 152) with China as the leader.

Chun divides the book into three sections – a history of China and the global capitalist ideology, the present interplay between the two, and her predictions regarding the future of the world socioeconomic order.

In the first section, she emphasizes the dynamic nature of China, claiming that this has resulted in a secular, independent and socialist state with a commitment to the centrality of the people (p. 8). Chun also goes on to vehemently refute the Marxist claim of Asian societies being passive and as awaiting capitalist integration, claiming that this idea creates a tendency to ignore all possibilities of progress via other non-capitalist socio-economic models.

In the next section, Lin Chun discusses China’s shift from being a socialist bastion to a capitalist economy, and how it has impacted the nation and its people. She claims that the changing face of Chinese socialism has undermined the improvements that the socialist revolution had brought about, with the new reforms being the key drivers of this ‘peaceful evolution’ towards capitalist integration (p. 56). The fading boons of socialism, in her perspective, have created financial and structural deficiencies in the Chinese state, and have led to China becoming a vital part of the global ‘race to the bottom’[3] (p. 61). Her commentaries on the revolution carry a strong rosy note that seems to ignore the bleaker sides of the revolution and only focus on the positives. She attributes the current welfare and labour issues in China to the monopolization of decision making power in the country. This ‘proletarianization’[4] of the population, she declares, is against the Chinese vision and creates a need for ‘regime legitimization’ by the government by returning to its social commitments as stated in the Chinese constitution (p. 66-69). Throughout her narrative, there is a call for China to return to the pre-reform era. However, the author’s call to undo reforms in China trivializes several important arguments she makes against capitalism by taking away focus from them and pinning it to an impossible aspiration. It is not only impractical for China to undo years’ worth of reforms but also undesirable – it is because of the reforms that China has been able to capture the global power it enjoys today, and for a country that is highly dependent on trade, closing borders would be unreasonable.

On the topic of the existence and the need for a ‘Chinese model’ (p. 81), Lin Chun claims that any model that the government chooses to adopt will serve Chinese interests if it fulfills four prerequisites: a robust socialist state, a resourceful public sector, a focus on collective growth and development, and voluntary social organization, participation and power. She advocates the adoption of a sustainable approach to progress where urbanization, modernization and privatization are not standardized measures of development and instead there is a focus on achieving Minsheng.[5] She ends this section by asserting that the Chinese goal is ‘capitalization without proletarianization’ (p. 156) and the only way to achieve that is by creating a balance between the industrial and agricultural resources in the country, and by focusing on the ‘local’ needs of the people.

The last section of the book delves into the future she envisions for China and the world order. She declares that growing global sensitivity to human rights and ecological sustainability will inevitably result in an anti-capitalist world order. She highlights the insufficiency of the current Eurocentric worldview as a measure of development and holds the ‘moral socialist economy’ as a likely end to the global fight over socioeconomic models of growth. She ends with a call for China to reclaim its place as the leader of the global economic order.

Overall, the book comes across as intensely deterministic and ignores several shortfalls of socialism and the Chinese state. It also overemphasizes the perceived negatives of capitalism. Lin Chun has written a book with a coloured understanding of the socioeconomic models it talks about, and there is a unique sense of Chinese exceptionalism throughout the book. The flow of the arguments highlight Chun’s own New Left ideology[6] and robs the readers of a chance to formulate their own opinions. The chapters appear to be individual essays, with little logical linkages.

However, one attractive characteristic of the book is its use of Marxism and the dependency theory to formulate arguments for socialism. The book follows a clear theme about the origin, cost and durability of the Chinese model of development. The author attempts to relate China’s growth with the long term global trends and pushes for the adoption of a perspective of social justice and political righteousness instead of generic economic indicators as measures of progress. So, while the book has a biased narrative, it does develop a new understanding about measuring progress and creating new modes of development by focusing on value creation over accumulation.

However, being written in 2013, Lin Chun’s predictions of an anti-capitalist world order appear to be far from realization today. While the world does seem to be shying away from the snowballing externalities of capitalism, it is no closer to demanding a socialist revolution than it was when the book first came out. In this respect, the author seems to have missed the mark, being overly embroiled in her ideological aspirations, to objectively analyze the possibility of a change in the world order. Despite its shortcomings, the book comes out as a commendable assessment of the logic and crises of capitalist integration and raises crucial questions about how the global economy will address them in the coming years.

End notes:

[1] ‘The Nordic model encompasses a mutually supportive interaction of risk sharing and globalization. It is marked by a large welfare state, a particular set of labour market institutions and a high rate of investment in human capital’ in Andersen, T., Vartiainen, J., Tson Söderström, H., Holmström, B., Honkapohja, S., & Korkman, S. (2007). The Nordic Model: Embracing Globalisation and Sharing Risks. Yliopistopaino, Helsinki: Taloustieto Oy.

[2] The book was published on December 2013 by Palgrave Macmillan. ISBN: 978-1-137-30125-3

[3] For the author, ‘race to the bottom’ signifies the socio-economic phenomenon of countries exploiting labour and capital to reduce costs as much as possible, in an attempt to retain competitiveness in an increasingly unified global market.

[4] A Dictionary of Sociology, 1998. “In Marxism, proletarianization is the social process through which individuals from the middle class become absorbed into the working class as wage labourers, and producers are separated from the means of production through coercive and persuasive means”.

[5] Ancient Chinese principle of popular wellbeing, and development as freedom (p. 99-104).

[6] This claim is based on Chun’s participation as a writer for New Left Review, and her book ‘The British New Left’.

SME Financing: The need for Concrete Reforms in China’s Financial Sector

“As China plans loan boost for small companies, technology firms could be the answer”

The annual meeting of China’s legislative body, the National People’s Congress (NPC) came to an end on 15 March 2019 with Premier Li Keqiang expressing commitment towards several reforms in China’s banking and financial sector. Apropos the reforms, the large state-owned commercial banks have been instructed to increase their lending by 30 per cent to micro, small and medium enterprises (MSMEs). Economists, analysts and bankers remain sceptical however, owing to the vague character of the declarations. Detailed and clarified reforms are required in order to encourage truly productive lending.

At present, there are 38.82 million MSMEs in China. MSMEs in China are defined as firms with less than 300 employees, an average revenue of RMB 30 million and RMB 40 million in assets. Market liberalisation and reform policies in various sectors and industries have been beneficial for MSMEs. MSMEs have emerged as a crucial component of China’s economy as they account for 75 per cent of total jobs, alleviate poverty and facilitate rural development. However, vulnerabilities remain due to poor execution of reforms.

For example, reforms have been inadequate with respect to the property rights of the SMEs, leading to the discouragement of private investors. Investors face problems in administrative procedures like taxation due to vague definitions. In particular, firms find it difficult to predict the level of tax they will face owing to the ambiguity regarding whether they qualify as a state-owned or collective owned enterprise. Raising lending targets of banks without addressing this ambiguity, therefore, is not adequate to empower MSMEs.

While the Chinese government expects total loans made to MSMEs to increase by RMB 300 billion on account of the raised lending requirements, this may not materialise due to lack of clarity in the NPC report. Although it instructs banks to lend to “small companies,” it is uncertain whether this term is defined the same as MSMEs or whether it refers to a subset of these. These will exacerbate existing confusions – only 63.1 per cent of the total SMEs in China applied for loans from the institutions as of 2018. Moreover, the creation of too many administrative stages in lending procedures for Township and Village Enterprises (TVEs) has made the entire affair more time-consuming.

Nor has the recently expressed reform commitment adequately addressed shortcomings in the Credit Guarantee System (CGS) – an institutionalised service offered by specialised agencies that help SMEs obtain loans from non-banking financial institutions. The CGS is intended to solve the problem of high financing cost for SMEs, reducing the bank’s management and operational risks, while developing the credit rating agency market in the country. It suffers from notable shortfalls that are in need of resolution. Firstly, the seven thousand credit guarantee subsidiaries that currently exist are still not catering to the problem of asymmetric information between the banks and enterprises. Enterprises are not adequately aware of collateral management, ways of repaying previous loans and other finance related technical details (like credit score) that the banks can mentor to the SMEs.

Secondly, there are no specific changes in the collateral requirements by the government, which is of significant concern for the banks. Even though the CGS Policy is well defined in official papers, it is not very efficient at the grass root level as the bank managers are still reluctant to invest in SMEs. This is also owing to the rising non-performing loan ratio – banks are, thus, resorting to fulfilling their annual loan targets by lending largely to small State-owned enterprises (SOEs) on the grounds that the state guarantees repayment. For example, the famous InnoFund government program that supports R&D activities does not fund the MSMEs at opening stages as the preference is for state-backed companies.