Is China Re-routing Its Exports To India Through Hong Kong?

The declining trade deficit between India and China in 2018-19 seems to be a good sign in the wake of the proposed Regional Comprehensive Economic Partnership (RCEP) deal between the ten member states of the Association of Southeast Asian Nations (ASEAN) and the six Asia-Pacific states including India and China.

It allays the fear of Indian industries that Chinese product will not flood the India market after the deal. However, there seems to be a Chinese plot to it which becomes apparent when one looks at India’s trade with Hong Kong.

In 2017-18, India exported goods worth $13.33 billion to China but at the same time, China’s export to India was $76.3 billion. Hence India’s trade deficit against China stood at $62.97 billion.

Almost a year later in 2018-19 (April-Feb), while India’s export to China went up to $15.1 billion, China’s export to India declined to $65.3 billion, resulting in a decline in the trade deficit from $62.97 billion (2017-18) to $50.2 billion in (2018-19, April-Feb). (Please see Table 1)

In other words, India has saved $12.77 billion in almost a year from its trade with China and it’s a reason to cheer about.

But, a look at India’s trade with Hong Kong - an autonomous territory and a special administrative region of China – shows a need to dig deeper into the data to unfold this Chinese plot.

When we analysed the past two years data, it was found that as compared to 2018-19 over 2017-18 the total imports of India from Hong Kong has gone up by 5.4 US$ billion.

Interestingly, all the major commodities in which India’s import from China have shown a decline, a corresponding increase has been observed with Hong Kong. These commodities are fruits, minerals, electrical machinery and equipment and iron and steel among others. (Please see Table 3)

Mohit Singla, Chairman, Trade Promotion Council of India, a body recognized by the Ministry of Commerce, says that India’s trade deficit with China has always been a major trade concern and the recent reduction in the trade gap possibly seems to be an attempt to camouflage the real value of trade deficit.

“There has been a one-to-one product correlation of reduced export from China to India and corresponding increase from Hong Kong to India, during the same period. For all trade purpose and calculating trade figures China and Hong Kong may be treated as complementing entity,” Singla says.

It is interesting to note from the data that major products such as electrical machinery, nuclear reactors, mineral fuels and Iron and steel among others are mainly produced in China and not Hong Kong.

“Hence, it seems that the route of the commodities entering India is changing,” Singla adds.

Hence, from the above analysis, it has been accounted that out of 12. 77 US$ billion decline in trades deficit, 1.73 US$ billion is due to an increase in exports to China. The 11.04 US$ billion is explained by an increase in imports from Hong Kong which is 5.4 US$ billion.

“Hence, the best optimal decline in trade deficit with China turns out to be 5.75 US$ Billion. Now in realistic scenarios, we need to consider the genuine trade trend, because every flow is not due to deliberate policy oriented. Thus what could be figured out as a genuine camouflage trade deficit may range from USD 3 billion to 5 billion,” says Rachit Chawla, CEO and Founder of Finway Capital, a non-banking financial firm.

Trade experts and economists agree that there seems to be an inside story behind trade data for this re-routing of Chinese exports to India through Hong Kong.

According to Dr. Pralok Gupta, Trade Expert and Associate Professor, Centre for WTO Studies, IIFT, New Delhi, there could be three main reasons for doing so.

“First, there is a huge concern by India about its increasing trade deficit with China in India-China trade relations. India is raising pressure on China to open-up sectors of India’s interests, such as pharma and services sector especially IT, so as to expand India’s exports to China and to have a check on the rising trade deficit with China. A declining trade deficit with India will help China in circumventing such pressures from India,” Gupta says.

The second reason, according to Gupta, is that China may be trying to side away the patriotic campaigns and feelings in India against using Chinese goods, however, this may not be successful in reality as mostly no differentiation is made between Chinese goods and Hong Kong goods and both are considered as Chinese goods only in India.

The third reason relates to the ongoing Regional Comprehensive Economic Partnership (RCEP) negotiations, a prospective trade agreement between the ten member states of the Association of Southeast Asian Nations (ASEAN) and the six Asia-Pacific states - Australia, China, India, Japan, South Korea and New Zealand - with which ASEAN has existing free trade agreements.

“Media reports suggest that the Indian industry is apprehensive of the Indian market being flooded by Chinese goods once this trade agreement comes into existence. Re-routing its exports through Hong Kong could be China’s ploy to overcome such apprehensions of Indian industry and to show that trade deficit is showing a decreasing trend hence increasing the competitiveness of Indian industry,” says Gupta.