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DC’s Red Carpet Modi Welcome Contrasts Cool China Relationship

The effusive welcome afforded by the Biden administration to Indian Prime Minister Narendra Modi stands in marked contrast to the stilted reception that greeted U.S. Secretary of State Antony Blinken on his trip to Beijing that preceded Modi’s state visit to Washington. 

It also indicates how the Indo-Pacific’s geopolitical landscape is tilting for companies and investors.

The flurry of direct investment announcements by U.S. companies in India in the defense and semiconductor sectors that Modi’s visit triggered further reinforces this.

These included:

  • a joint venture between General Electric and India’s state-owned Hindustan Aeronautics to produce advanced engines for India’s indigenous fighter jets;
  • a USD3bn order for General Atomics’ Predator drones;
  • a USD825mn investment by Micron Technology to build a semiconductor assembly and test facility;
  • a USD400mn investment by Applied Materials to set up an engineering center; and 
  • a training program for 6,000 Indian engineers to be run by Lam Research to speed up India’s semiconductor education and workforce development. 

The common denominator is China as a competitor for both the United States and India. A greater perception of that rivalry in New Delhi is forcing India to recalibrate its overall foreign policy of “strategic autonomy.” At the same time, Washington seeks to diffuse the global concentration of chip supply in East Asia and to strengthen New Delhi’s military capacity to counter Beijing, both in the waters of the Indo-Pacific but also in the western Himalayas, where the two countries have a decades-long border dispute.

U.S. firms supply only 11% of India’s arms, but they have hopes to supplant Russia as the primary provider in the coming years. The defense sector deals signed during Modi’s trip indicate that India is a willing buyer and Washington a willing seller and that the United States is comfortable sharing military technology with India.

As for chip makers and makers of chip-making equipment, this will open investable opportunities for U.S. defense and aerospace companies not available to them in China.

Meanwhile, thebet of U.S. and other Western equity investors who thought China’s economy would rebound strongly following the abrupt lifting of Beijing’s draconian “zero-Covid” measures last November looks fragile.

After beating expectations in the first quarter, China’s economy has slowed. The high-frequency indicators show that business conditions are worsening, retail sales and fixed-asset investment are weak and youth unemployment is at a record high.

Structural problems of shadow banking and local government debt remain concerns. The property sector, while stabilizing, is not recovering. The rising geopolitical tensions with the United States and Beijing’s crackdown on international—mainly U.S.—consulting firms give investors more reasons to trim their equity exposures to China.

Not that Beijing is standing idly by. In the past week, the People’s Bank of China cut more interest rates to provide further modest stimulus, following a call by the State Council, China’s top administrative body, for stronger measures to support the economy.

The one-year and five-year loan prime rates were reduced by ten basis points to 3.55% and 4.20%, respectively. The move follows June 15’s cuts to the one-year medium-term loan facility and, two days before that, the seven-day reverse repurchase rate. 

The cuts could help stimulate demand and mortgage lending but will be insufficient to boost significantly low consumer and business confidence, which will likely continue to hold the economy back.

Additional targeted stimulus can be expected in the coming months to boost the economy in the second half to ensure that the official GDP growth target of 5% is hit. This will likely include policies to tackle youth unemployment, seen as a social stability even more than an economic risk.

However, China will not aggressively stimulate its economy, with the Politburo emphasizing the importance of de-risking in the property and financial sectors.

Nonetheless, the latest Politburo and Central Commission for Financial and Economic Affairs meetings have also singled out new energy vehicles and artificial intelligence (AI) for greater policy support. The latter, in particular, will be challenging for U.S. investors to get equity exposure to, given Washington’s growing proscriptions on U.S. investment that would help develop China’s technology and military capacities, restrictions that do not apply to India.

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