India must turn Chinese investment into trade leverage

In both business and political circles, a question is often asked, 'How can India correct its trade asymmetry with China?' The answer, paradoxically, lies in greater Chinese investment.

China's growth has been slowing. GDP grew only 4.3% last quarter, and retail sales - indicator of domestic consumption - rose only 1% in June. As the West grows less willing to absorb Chinese overcapacity, China's next move may be to export the factory itself - capital, technology, brands and production. India now has to decide whether it will host this relocation, on its own terms, or whether it will watch others like Vietnam and Mexico grab it, instead. It must also assess whether hosting, done right, can finally correct the imbalance India has lived with for two decades.

The imbalance is structural. Every time Beijing wants leverage over India, it reaches for trade: restricting gallium and graphite exports in 2023, and rare-earth magnets in 2025, with Indian assembly lines feeling the pinch. Beijing can do this almost cost-free because it holds none of India's risk in return - no factories, Indian workforce or equity that falls in value if relations sour. India is exposed to China, but China is not exposed to India. Chinese investment can be the lever to correct this asymmetry.


India's exposure is easy to quantify. China is now India's largest trading partner. Bilateral trade of $151 bn in 2025-26 was almost entirely one-way. India imported $131 bn and exported just $19 bn, a record $112 bn deficit, up from $99 bn a year earlier. China supplies a 6th of India's imports and close to 31% of its industrial goods. In some categories, there's over-reliance. About 70% of active pharma ingredients and 75-90% of lithium-ion cells are Chinese imports.

In contrast, China's exposure to India is almost none. China's annual outward FDI runs near $177 bn, with $2.7 tn in total overseas investment since 2005. India isn't among its top 10 destinations with just $2.5 bn in Chinese investments cumulatively over 20 yrs. Compare this to Hungary, which took in 31% of Chinese FDI into Europe in 2025, with new energy tech company CATL and EV giant BYD plants employing thousands. India absorbs Chinese goods, but captures almost none of Chinese capital or factory activity.

Every economy depends on others. The problem is one-directional dependence. The fix is to make dependence run both ways. A Chinese plant in India, providing returns to investors, is a stake that Beijing will protect, not a tap that it can shut without costs.

On trade, India has already begun diversifying: FTAs with the UAE, Australia, Britain and the EU, since 2021. It's time to apply the same logic to investment. Adding Chinese capital alongside Singapore, the UAE, the Netherlands, the US and Mauritius - which together account for over 80% of India's FDI - will diversify India's capital base.

None of this means 'normalisation' with China. Just tactical realignment. The border remains unresolved, and China's business practices continue to be opaque. The answer lies in well- calibrated guard rails. For instance, the Committee on Foreign Investment in the US (CFIUS) screens Chinese capital sector by sector, rather than banning it. It keeps it out of critical sectors like AI, quantum and semiconductors, but permits passive stakes elsewhere.

India's March 2026 easing is similar - entry only via a 10% automatic-route ceiling, confined to non-critical manufacturing, majority ownership and control with resident Indians, and a 60-day fast-track for capital goods, electronic components and solar cells.

Gains are already showing. Electronics component exports to China rose from $920 mn to a projected $3.5 bn in a   year. Over $2.5 bn of this was from Apple, and printed circuit board assembly (PCBA) exports reportedly jumped 40x.

India already imports vast quantities of Chinese machinery to build its own factories. Why not let Chinese manufacturers set up here, instead? Supply chains are sticky. Once a plant embeds in an Indian cluster, its suppliers, tech and trained workers tend to stay, backward-integrate and increase domestic value-add, just as Apple's vendor base has done. Also, in sectors like textiles, Chinese factory discipline, output per worker, defect rates and on- time delivery are worth absorbing regardless of ownership.

South Korean manufacturers once absorbed techniques from the Japanese and Americans. China itself industrialised partly on Japanese investment. India can do the same with China now. As Beijing prepares to export its factories to the world, this is an opportunity for India to create new business opportunities and gain leverage. Pragmatism should be the lens. There is a business case here.