China’s National Bureau of Statistics recently reported a slowdown in third-quarter Gross Domestic Product (GDP) growth to 4.9%, triggering concerns worldwide. The possibility of a slowing Chinese economy can potentially impact the nascent global recovery as well as other regional economies, including India.
Reasons for the Growth Slowdown
The slowdown in China’s economic growth is an outcome of several factors:
The Base Effect
China did remarkably well reviving its economic growth post the Covid-19 pandemic, establishing a high benchmark for growth. This ‘base effect’ – the contrast with the previous quarter’s robust performance – sheds light on the current reduced growth rate. Moreover, after two decades of double-digit growth, the Chinese economy has reached a ‘mature’ stage where a slowdown is inevitable.
Fuel/Power Crisis
A recent surge in coal prices led to an electricity shortage, forcing provincial governments to ration power supplies. The ongoing fuel/power crisis continues to hamper factories and units across China, particularly in the industrial heartland of the southeast, resulting in curtailed output.
Turmoil in the Real Estate Sector
The Real Estate sector, which accounts for approximately a quarter of China’s GDP, is showing signs of a notable slowdown, largely driven by the Evergrande debacle. Evergrande Group, a real estate colossus in China, is battling potential default on billions of dollars owed to bondholders.
About Evergrande Crisis
Evergrande was instrumental in driving the post-pandemic Chinese economic recovery. However, a gradual downturn of China’s property market and dwindling demand for new houses have critically impacted its cash flows, locking up nearly three-quarters of the nation’s household wealth in housing. A potential Evergrande collapse can have a domino effect on the whole economy, threatening to trigger a ripple effect on global commodities and financial markets.
Impact on the Global Economy
Impending Global Recovery
The restarting of industries in China post-pandemic has played a pivotal role in global economic recovery. Therefore, systemic risks threatening the Chinese economy could lead to an overall setback in global post-pandemic economic recovery.
Effect of Trade War
The US-China trade war has resulted in a slowdown of Chinese exports, leading to losses for countries, especially in South Asia, that rely significantly on China for ‘Supply Value Chain’ for producing components and finished goods.
Effects on India
Imports
India’s bilateral trade with China grew nearly 50% in the first nine months of 2021. Major imports from China include smartphones, automobile components, active pharmaceutical ingredients, and other chemicals. Hence, any slowing down of the Indian economy can profoundly impact India’s consumer market and infrastructure development.
Exports
India’s robust iron ore exports to China could face a hit if the ongoing crises trigger a prolonged slowdown in the Chinese real estate market.
Investments
A sluggish Chinese economy can prompt an investment outflow from India. However, economic reforms undertaken by India could potentially position it as the next global manufacturing hub.
Recent Economic Reforms in India
Efforts towards becoming the new global manufacturing center include new initiatives like PM Gati Shakti Scheme, National Monetisation Pipeline, Labour Codes, and Atma Nirbhar Bharat Scheme.
A Look Ahead
To safeguard its economy, India needs to diversify its imports from China, enhance export competitiveness, and actively participate in global supply chains.
