Big Picture, GS-2, GS-3, Indian Economy, Uncategorized

Impact of Chinese slowdown

China’s economy grew at 6.9% in 2015, but that was a slowest growth rate for the world’s second largest economy in 25 years. The IMF has projected China’s growth rate to be 6.3% in 2016. There are expectations of further devaluation of renminbi or yuan by China to boost its exports. This could erode the export competitiveness of other countries and fuel currency market volatility. China’s slowdown is also one of the big drivers of massive fall in oil process and that is causing its own problems. Many believe that China’s slowdown could lead to a cycle of decline around the world.

However, few experts say that estimates of IMF and other estimates about China are still high when compared to the overall global growth rate which is at 2% or less. When compared to the biggest economies like US and UK, China is still on the brighter side. Some experts also indicate that China is passing through a phase through which all the developed countries have once passed, which is called as middle income trap. China is also restructuring its economy for domestic consumption. Hence, the overall slowdown might be slightly fuelled by this and should not be a cause for concern.

On the other hand, few developments like swelling of trade volume in 2015 by 7%, slowing down in bank lending, shrinking manufacturing sector and depleting foreign exchanges indicate a different story. Looking at these developments, some argue that what is happening in China is not a cause but an effect. Hence, according to them the world economy is heading towards a recession. Added to it are the falling export rates of various developing countries including India. However, China is not willing to increase its buying rate in the world market by cutting down its reserves. Another significant reason for the slowdown may be the now stable population in China which has reportedly brought down the growth rate by 25%.

So far, China was one of the biggest buyers of commodities. Now the commodity exporting countries of Africa and Latin America will definitely be hit by Chinese slowdown. This added with falling energy rates will affect these countries.

In Europe, the Middle East, and Africa in particular, there are three ways in which a China slowdown will substantially impact regional economic growth:

  • A fading export market: China’s boom has provided a growing, reliable export destination for many European companies, but a slowdown will suppress top-line growth for industrial, technology, and consumer firms alike. The commodity-led economies of the Middle East and Africa could be harder hit. Chinese demand has filled the void left by Europe’s stagnant consumption. Reduced commodity exports would cut governments’ ability to spend, weakening an important growth driver for many of the world’s most dynamic frontier markets.
  • A pullback in foreign direct investment: One-quarter of all FDI into Sub-Saharan Africa since 2006 has come from China. However, recipients of Chinese FDI are less likely to be severely affected, because Chinese companies are more likely to focus on growth internationally if their domestic market weakens.
  • A trigger of financial-market instability: Depending on whether a Chinese slowdown surprises global financial markets, financial volatility would result in a flow of capital back to developed markets, causing significant currency volatility in EMEA and impacting the prices of goods imported from developed markets, hurting consumers across the region.

But, rejecting this argument, some experts say at the best times, China constituted 10% of the world imports and 12% of the world exports. At the peak they constituted 12% of the world demand. The bigger amount of demand still lies in Europe, USA and Japan. China has lived on export growth. Hence, if it doesn’t change its policy now, it will be the worst affected. Thus, the slowdown may not affect the world as a whole.

India is set to become the world’s fastest-growing major economy by 2016 ahead of populous neighbour China that is battling an industrial deceleration. India is expected to grow at 6.3% this year and 6.5% in 2016 by when it is likely to cross China’s projected growth rate. However, in the short run, China’s slowdown may slightly erode India’s export competitiveness and fuel currency-market volatility. Our economy is strongly integrated with the Chinese one, and there is no escaping the impact of a slowdown in what was until recently the engine of global growth. The Indian companies in which they invest are battling several fallouts: Poor demand for their products in China due to slow growth and a weaker yuan, the prospect of dumping of Chinese goods in India, and higher costs of servicing dollar debt due to downward pressure on the rupee.

For India, the impact of China’s slowdown has been on the rupee, which recently breached the 68-to-the-dollar mark, likely driven by heavy selling of Indian shares by foreign investors. A weak rupee will make imports costlier and is not having the usual tonic impact on exports because our key markets are slowing down. It will also make the Reserve Bank of India think long and hard about further interest rate cuts and could eat into our dollar reserves. All in all, the world economy is a complicated broth, with China the most toxic ingredient.

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