India has denied security clearance to plans by mainland China's oldest bank to open a branch in Mumbai, sources in the Union home ministry said today.
Keen to open a branch in India's financial capital, Bank of China had applied for security clearance in July last year.
Initially, the home ministry had said it had no objections to the proposal as Bank of China would have to adhere to the Reserve Bank of India's rules and other regulatory guidelines before setting up the branch.
But the ministry has now gone back on that position - a move that sections of the foreign office fear could further escalate tensions between the Asian neighbours and deter Chinese investment in India.
Officially, the concerns over Bank of China's application involve its ownership - real and believed. The state-owned investment firm China Central Huijin owns majority shares in the bank, the oldest of China's five mega banks. But Indian security agencies suspect the People's Liberation Army's money too is invested - through the investment firm - in the bank, giving it direct leverage over its operations.
But the move to block the clearance for Bank of China to open a branch in India is also a message to Beijing, officials conceded.
China has not yet cleared a proposal by India to allow the State Bank of India to open a branch in its territory. The SBI proposal was made around the same time as Beijing pitched for Bank of China operations in India.
The messaging could, however, end up hurting India more than China, critics of the home ministry decision within the foreign office warned.
India has over the past three years aggressively wooed Chinese investments - both as a creator of jobs and as a route to reduce the imbalance in their trade relationship, currently dramatically in favour of Beijing.
Chinese President Xi Jinping promised US $20 billion investments in India during his September 2014 visit, and junior foreign minister V.K. Singh last week affirmed that New Delhi was working closely with Beijing to realise that figure.
China has already signed pacts to set up mega investment parks in Gujarat and Maharashtra, and plans to set up at least two more.
Since May 2014, when the Narendra Modi government came to power, China is the leading source of foreign direct investments in India, officials said.
India has segregated its economy into "sensitive sectors" - like defence, ports and telecom - where it still does not welcome Chinese investments, and others - roads, highways and financial services - where it has told Beijing it wants China to invest.
Having made that distinction, officials said, a block on the entry of Bank of China could make Beijing rethink its other investments too.
It's a sword Beijing has dangled over New Delhi in the recent past too, when unofficial calls surfaced for the boycott of Chinese goods in October.
"India's boycott of Chinese goods will not have much impact on China's exports," Chinese embassy spokesperson Xie Liyan had said then. "China is more concerned that the boycott will negatively affect Chinese enterprises to invest in India and the bilateral cooperation, which both Chinese and Indian people are not willing to see."
The tensions that drove the boycott call - China's opposition to India's Nuclear Suppliers' Group membership, to India's demand for UN sanctions against Pakistan-based terrorists, and its construction of an economic corridor through Pakistan-occupied-Kashmir - remain.
But India also remains wary of sparking a trade war with China.
India imported goods worth US $61 billion from China last year and exported only US $ 9 billion to that country - an imbalance that New Delhi has concluded it can only correct through enhanced Chinese investments in India.