The China Syndrome

WHEN Zhu Rongji, China's former premier, visited India at the beginning of last year, he went to the high-tech city of Bangalore and talked about how India was a world leader in computer software, while China was strong in computer hardware.

"When we put these two together, we can become the world's number one," he declared. Zhu's statement was welcomed in the euphoria of his visit - but now India is not so sure. It has been growing increasingly concerned in the past year about what Arun Shourie, Telecom minister, has described as "back window" access that China's security forces can gain through collaborations in high-tech areas like Internet.

This suspicion of China's espionage has been creating complications as officials from the two countries prepare for a visit to Beijing by Atal Behari Vajpayee, India's prime minister - the first such visit for about 10 years. China is showing all the signs of wanting to improve relations with India. But it is upset that the Indian government has failed to approve several of its companies' applications for foreign direct investment - at a time when a growing number of Indian companies investing in China, ranging from software to truck tyres and other electrical goods, have not faced similar blockages .

So far the most public focus of India's concerns has been on the business activities of Li Ka-shing, Hong Kong's most powerful tycoon, and his family. Li is one of Hong Kong's best connected businessmen in Beijing and he has made no secret of the business advantages that this has brought him. India suspects that, in return, Li may be prepared to do Beijing's bidding if it called for favours linked with his Indian investments.

International worries about Li surfaced a month or so ago when he withdrew from a bid for Global Crossing, a bankrupt American cable operator, after his China links caused political and other resistance. The worries were picked up in India where Hutchison Ports, part of Li's Hutchison Whampao group, was last month left off a pre-qualification list of bidders for a Mumbai port dredging contract at Nhava Sheva, near a highly sensitive base of India's Southern Naval Command. Indian cabinet ministers also decided last month to delay approving an increase in FDI limits for telecoms companies from 49 per cent to 74 per cent because they were worried about the security implications of giving Li's Hutchison group, a leading player in the country's mobile telephony with around $1 billion invested, control over its various Indian joint ventures.

A little earlier, Shourie had accused a Delhi-based Internet company, a subsidiary of a Hong Kong company, of having links with China's Peoples Liberation Army. Drawing on information provided by India's security services, Shourie added that the company's technology could provide the Chinese with "back window" access to Indian Internet users' computers. Shourie never named the company but it is widely known that he was referring to Delhi-based Data Access, which has a joint venture with Pacific Century Cyberworks of Hong Kong. PCCW is controlled by Richard Li, the younger son of Li.

Hutchison and Data Access refute allegations of security risks. Data Access changed the diagnostic technology that provided the alleged access after it was approached by India's Telecom ministry two years ago. But even though the risks may not be as great as the distrustful security services have suggested, they do exist. All Internet service providers, says Ravi Prasad, a Delhi-based telecommunications consultant, install diagnostic and troubleshooting software "that enables them to see the entire contents of users' hard discs" - providing users with technological pluses that generally outweigh the snooping risks.

The espionage fear has emerged alongside rapidly growing economic links - two way-trade has risen by 60 per cent in the past year to around $4.5 billion - which have begun to build a new relationship between the two countries. India lost a bitter border war in 1962, since when it has seen its much larger neighbour as a serious long-term military (and maybe even nuclear) threat. Now it sees China as a growing economic rival and is especially worried that, within a few years, China might catch up with, and maybe overtake, its world leadership in software.

Despite the growing trade, there has been very little Chinese FDI into India - only about $64,000 so far this year. This is mainly because the government has not been clearling applications. There are currently no general restrictions on Chinese FDI, but senior civil servants are trying to formulate a strategy. At present, applications are being put through an ad hoc filter system that stops those thought to be technologically or geographically sensitive, but clears others. For example, Chinese construction companies are working on Indian highway projects and SEPCO, a Chinese power company, was allowed last month to go ahead with a $240 million turnkey power contract won at Balco, a former government-owned aluminium company that Sterlite, an Indian metals company, has privatised.

However, an application from Huawei Technologies, which is based in the southern Chinese city of Shenzhen, has not been so lucky. Huawei opened a telecom software research centre in Bangalore as a fully owned subsidiary in 1999, without any problems and now has a staff of 600, including 50 Chinese. In 2001 it faced allegations, which it denies, that it had worked for Pakistan and maybe even the Taleban. An application to start a separate firm that would manufacture telecom network hardware has not been approved by the Indian government. Clearly Zhu's dreams of high-tech cooperation between Indian software and Chinese hardware countries are a long way from being realised.