The government opened the door for Indian companies to borrow yuan-denominated funds from Chinese lenders. Sure, it limits the total amount of such loans to a modest $1-billion-worth every year, but the amount isn't important. The idea is one whose time has come.
China is already India's largest trading partner, with goods and services worth $60 billion moving back and forth, and growing about 40% every year. Indian companies and businesses are heavily invested in China, buying everything from electric turbines to faux-Italian furniture from the factory of the world.
The world's largest bank, measured by market valuation, is no longer in the West. At $234 billion, the Industrial and Commercial Bank of China now enjoys that distinction. Last week, it set up shop in Mumbai, again, with a modest initial investment of $100 million, most of which it plans to lend to Indian telecom, power and infrastructure companies that do business with China.
There's only one direction that trade and investment between the two Asian giants can go: north. Given that, it makes sense for New Delhi to let local businesses borrow in the Chinese currency.
One thing that emerged from the rubble of 2008's financial meltdown and the long recession that followed, was China's ambition to make its renminbi yuan a reserve currency that could hold its own against the dollar or the euro. Is this ambition feasible? Have India's policymakers taken a step on the road to the rise of the Redback?
Though it makes sense for Indian businesses to transact in the yuan while dealing with their Chinese counterparts, that's no guarantee that the yuan is poised to dominate currency markets. The biggest obstacle is the Chinese government, which maintains controls to the movement of capital into and out of the country, hobbling the yuan's acceptability as a major currency. Beijing also keeps a tight leash on the range in which the renminbi can move against other traded currencies. But over time, some of these controls could go and the renminbi could gain wider, well, currency.
Indians know that Beijing is driven by an almost unquenchable thirst for raw materials: oil, coal, iron ore and other minerals. Indian companies, mostly state-owned oil giants, have encountered their Chinese counterparts in faraway Africa, and come away from bidding battles with black eyes.
But that's only part of the story. Around 20 years ago, shaken by the uprising in Tiananmen Square and the implosion of the Soviet empire, the Chinese Communist Party took a long, hard look at the threats that it could face in future. The most obvious one was popular discontent arising from disparities in wealth: China's eastern coastal areas are many times wealthier than its vast interior provinces. What if the hinterland rose against the coast?
A study, which became influential among mandarins in Beijing, argued that America was wealthy and peaceful because it had two coastlines, the Atlantic in the east and the Pacific in the west. China, it argued, had only one coastline and needed access to another, 'warm water' coast to link its hinterland to trade and prosperity.
