World Energy Outlook 2007

There are major differences in the breakdown of exports from China and India.
Although clothing and textiles account for a similar share of both countries’
exports, other types of manufacturing account for a significantly higher share
in China than in India. Exports of services, made up largely of information
technology software services and IT-enabled business process services (such as
call centres and software application, design and maintenance), are much larger
in percentage terms in India. The total value of such exports is nonetheless
higher in China: $62 billion in 2004 compared with $40 billion in India
(Winters and Yusuf, 2007). India benefits from an abundant supply of cheap,
qualified English-speaking labour. Nonetheless, both countries still account for
a small share of the total value of IT-related services (1.8% for India and 2.8%
for China). There is considerable scope for China to boost the share of services
in its exports.
The main sources of increased commodity imports into China and India in
recent years have been Latin America, Africa and the Middle East. Most of the
two countries’ purchases from Latin America are agricultural products and
metals (Brazil is China’s third-largest supplier of iron ore), while they buy mainly
oil and metals from Africa. Commodity exporters have benefited from the rise
of China and India, both through stronger demand and higher prices for their
commodities and through cheaper imports of manufactured products.
The increasing integration of China and India into the global trading system
has been accompanied in recent years by liberalisation of both inward and
outward capital flows, though some restrictions remain. But, in both cases,
there is a marked asymmetry in the composition of their gross liabilities and
assets. The liabilities of both countries are mainly foreign direct investment
(FDI), debt and portfolio equity, which usually yield a significantly higher rate
of return than domestic assets. FDI has played a bigger role in China, which
was in 2005 the world’s second-largest recipient of FDI. It amounted to
$108 billion, or 12% of the world total (Figure 3.5). Even so, FDI still
represents a small proportion of total investment in China, the overwhelming
bulk of which is financed domestically. Although FDI amounted to only
$6.6 billion in India in the year to March 2007, this represented a three-fold
increase over March 2006 (OECD, 2007). Portfolio investment is the main
type of capital flow into India.
In contrast, the bulk of China’s and India’s assets are held in low-return liquid
foreign reserves, such as US treasury bills. Both countries have accumulated
large amounts of such assets over the past decade or so. China’s foreign
exchange reserves totalled $1.3 trillion at the end of June 2007. However, the
imbalance between assets and liabilities is starting to change, with growing
overseas direct investment (ODI) by Chinese and Indian firms. The bulk of
China’s ODI 3 is going to other Asian countries, but a significant share is going
to energy and other natural resource projects in Africa and Latin America. The
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Chapter 3 - International Trade and the World Economy 143