India security jitters rattle growing China ties

By Tony Munroe – Analysis

MUMBAI (BestGrowthStock) – India’s ban on imports of Chinese telecommunications equipment over spying fears underscores deep mistrust of its neighbor but is unlikely to derail cooperation between the world’s two fastest growing economies.

In a sign of how seriously India takes the matter, Prime Minister Manmohan Singh reprimanded his environment minister this week for accusing the interior ministry of being alarmist and paranoid about Chinese investments in India.

Surging bilateral trade and shared interests on matters ranging from climate change to the role of emerging economies in global institutions mean the two rising giants do not want to let their frequent disputes jeopardize broader mutual interests.

India’s decision to bar Indian mobile phone operators from placing orders with China’s Huawei Technologies (HWT.UL: ) and ZTE Corp (0763.HK: ) (000063.SZ: ) because of security concerns, according to industry sources, threatens to blow a hole in recent warming ties and bilateral trade approaching $60 billion.

“The most likely scenario is that the Chinese will go into dialogue with India to try to resolve this,” said Bhaskar Roy, a New Delhi-based analyst on China.

China’s ambassador to India and Chinese executives have been paying visits to the home secretary, who is in charge of security, to allay fears their gear can be used for spying.

If India sticks to its guns it would shut the Chinese firms out of the world’s fastest growing telecoms market and drive up costs for Indian operators.

Capital spending by Indian mobile firms will approach $15 billion this year, from about $10 billion in 2009, said Shiv Putcha, managing analyst at Ovum India.

In a sign Beijing has little interest in escalating the dispute, both firms proposed building factories in India and Chinese executives of Huawei in India have gone so far as adopting Indian names.

“ZTE may win approval but it will be hard for Huawei to convince us because of the company’s past links to China’s Peoples Liberation Army. Don’t forget we are not the only country worried about Huawei,” a senior government source, who declined to be named, told Reuters.

Huawei, founded by a former PLA officer, says it is entirely owned by its employees but has long been shrouded in secrecy.

Srikanth Kondapalli, a professor of Chinese studies at Jawaharlal Nehru University, said while the row might rumble along, it will be at a low level and will not disrupt the broader relationship.

“Because both of them are rational actors, I think they will divide issues of cooperation, competition, or conflict,” he said.

While the barring of Chinese telecoms gear has been front-page news in India, China’s state media has made little mention of the dispute and has covered it as a corporate story, not as a potential source of bilateral tensions.

“I certainly don’t think that this marks some sort of U-turn in the trade relationship,” said Zhao Gancheng, a prominent expert on China-India relations at the Shanghai Institute for International Studies, a state-run think tank. [nSGE64D0J4]

“There’s still a great deal of complementarily and room for trade growth … I see this as an individual case, a symbolic case, that doesn’t represent the entirety of the economic relationship, and China won’t treat it in that way,” he said.

LONG RIVALRY

Tensions between Asia’s two rising powers have simmered since their border war in 1962, but in recent years Beijing and New Delhi have mostly managed to compartmentalize their differences.

The relationship has matured to the point that while they can jointly advocate for the interests of emerging economies through forums such as the Group of 20, India has the confidence to criticize Beijing’s currency policy.

Still, India remains deeply wary of its bigger and more powerful neighbor. China, a long-time ally of India’s bitter rival Pakistan, is feared to be encircling India in a “string of pearls” by investing in its neighbors such as Sri Lanka.

Navy officials say increasing numbers of Chinese ships are sailing just outside Indian waters, and the two still spar over their disputed Himalayan border.

And while China is India’s biggest trading partner, the balance is heavily in China’s favor. India’s trade deficit with China rose from $1 billion in 2001-2 to $16 billion in 2007-8, according to Indian central bank data.

CHEAP GEAR OR SPYWARE?

India worries that Chinese telecoms network equipment can be used for spying or loaded with “malware.” It is also worried a rival could shut down telecoms service during a time of crisis.

A series of attacks on Indian government websites by suspected Chinese hackers has also hardened the authorities’ position on importing potentially sensitive equipment from China.

“At any time we don’t want anyone to be able to pull the plug in terms of a crisis. And that means anyone, not just China,” U.K. Bansal, India’s internal security chief told Reuters.

Last year, India directed state telecoms operator Bharat Sanchar Nigam (BSNL.UL: ) not to procure equipment from Chinese vendors in 15 border provinces, citing national security.

Still, bilateral relations between the world’s two most populous countries had been improving until recently.

A ban on China’s telecoms equipment, which costs about one-third less than Western gear, would raise the cost and slow the buildout of mobile networks in India.

India is the biggest overseas market for ZTE, where its market share is about 15 percent and it sold $750 million worth of equipment last year. Huawei, the global No. 2, sold about $1.4 billion in equipment in India in the year to March 2009.

“There is no doubt that any kind of ban will impact the business cases of mobile operators, particularly the new entrants, who will be forced to look at more expensive alternatives from Western companies,” said Ovum’s Putcha.

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(Additional reporting by Christopher Buckley and Emma Graham-Harrison in Beijing and Devidutta Tripathy, Paul de Bendern, Bappa Majumdar and Krittivas Mukherjee in New Delhi)

India security jitters rattle growing China ties