Home / Opinion / Views /  How bad is China’s slowdown, and how will it impact India?

Much of it is self-inflicted. The Chinese economy has slowed to a crawl, growing at just about 0.4% in the second quarter, as a zero-covid policy has begun to hurt. A crackdown on real estate speculation has further aggravated the economic crisis. It impacts global inflation in a complex form–prices of manufactured goods will rise while pressure on commodity prices will ease.

The Chinese slowdown is also hurting India in the near term. India has to contend with a sharp drop in exports to its neighbour and a spike in the trade deficit as demand cools off in China.

Just why is the Chinese economy slowing down?

China has had an unrelenting zero-covid policy from the very outset. It has responded with hard lockdowns and stringent quarantine measures to keep the pandemic on a tight leash. It helped it contain covid initially, and its economy rebounded swiftly in 2020, but lockdowns in recent months have disturbed the economic momentum.

In July, the New York Times reported, citing Nomura Securities, that covid lockdowns impacted 247 million people in 31 cities. It’s about 20% of the national population, accounting for about $4.3 trillion in annual GDP. Consequently, domestic consumption has dropped sharply, and unemployment figures are disconcertingly high.

This slowdown has taken a big toll on China already. Remember, China claimed to have eradicated extreme poverty in 2021, but its stringent covid lockdowns have eroded living standards, and millions are at risk of slipping into poverty again. In many ways, it’s a crisis similar to what India faced during the covid-induced lockdown–the small and medium enterprises (SMEs) were the hardest hit.

Consider the scale of the problem. In China, there were over 140 million SMEs and self-employed in 2020, according to the OECD. They contribute over 60% of total GDP, 50% of tax income, 79% of job creation and 68% of exports. At least three million small businesses had closed down between January and November 2020, according to business data and analytics company Qichacha. The Chinese and Hong Kong media has extensively quoted this study. About 4.37 million small businesses shut shop between January and November 2021, according to media reports. These developments will clearly test China’s resolve to prevent its working-class population from falling back into poverty.

How is China responding to the slowdown?

Earlier this year, Beijing announced a multi-pronged initiative to support citizens. According to the annual report of the National Development and Reform Commission, the state planner, the Chinese government will improve agricultural infrastructure for farmers, help specific groups find jobs or reskill them, prevent mass unemployment, and provide other direct financial support.

The Chinese government has now asked its richest provinces—Guangdong, Jiangsu, Zhejiang, Shandong, Henan and Sichuan— to support pro-growth measures. The People’s Bank of China has responded with cuts to its lending rates to stimulate demand.

Meanwhile, the Chinese state media has defended the country’s zero-tolerance of covid, arguing it created a safe and stable environment for China’s development and the world. While cases continue to fall in China, on Wednesday, it still reported over 1,500 infections.

How severe is the real estate crisis?

China has to deal with a fairly severe real-estate crisis as well. The housing market has been hit by a funding crisis that has stalled several projects, culminating in more than hundreds of groups of homebuyers refusing to pay their mortgages.

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These real-estate projects were sold through the presale system, an accepted practice in China. Here, buyers deposit the money for their house in an account, and the Chinese banks and authorities keep an eye on the end-use of these funds by builders. Many buyers now believe that builders have illegally siphoned this money into new projects without completing their existing ventures. As a result, the government tightened real-estate regulations in 2020, capping the debt levels of developers, which has pushed many of them to bankruptcy.

The concern remains that a real-estate meltdown would hit the balance sheets of banks, which have about 25% of their assets parked in property, impact household budgets and consumption, and bankrupt many small businesses which feed off consumption. But the crisis can’t be compared yet to the 2007 subprime mortgage crisis in the US, where many homebuyers were unable to repay their home loans—the Chinese middle-class has ample savings to ride out this crisis, believe experts.

Still, there are worries that the real-estate shock may force banks to become conservative lenders and local authorities, deprived of revenues from land sales, may have to cut spending on infrastructure and development projects, slowing down the economy further.

What does the Chinese slowdown mean for the world and India?

As we said, the Chinese economy will impact global inflation in two ways–prices of manufactured goods will rise while pressure on commodity prices will ease. China, the world’s factory, is also one of the world’s largest consumers of a range of commodities—from oil and steel to wheat and soybean.

China accounts for over 18% of the global GDP—that’s more than the combined GDP of the European Union and stacks up to almost a third of global manufacturing.

It is the world’s second-largest economy, and its troubles impact the entire world. While lockdowns have worsened supply chain bottlenecks for the world, faltering demand in China has hit operations of some of the world’s biggest corporations.

The IMF has already warned that the imbalances in supply and demand triggered by the lockdowns in China will worsen inflationary pressures in the world.

Some of the biggest corporations have reported hurdles in manufacturing due to supply chain problems in China. Apple had estimated lockdowns in China could mean a loss in sales of anywhere between $4 billion to $8 billion. Many other corporations too have similar stories, from Sony to BMW.

China is a big consumer of commodities, and its economic slowdown is hurting commodity exporters across the globe, from Brazil and Chile to Australia.

Meanwhile, Bloomberg reported in July that “China’s economic slowdown is spilling over to major exporting nations in Europe and East Asia through falling demand for manufactured goods, causing Germany and South Korea to post rare deficits with the world’s second-largest economy." The majority of China’s imports are manufactured products for its local market and also as inputs for exported products.

The Chinese slowdown has substantially increased India’s trade deficit with China.
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The Chinese slowdown has substantially increased India’s trade deficit with China.

In fact, it’s a story that has played out in India as well. The Chinese slowdown has substantially increased India’s trade deficit with China. In fiscal 2021-22, India’s exports to China remained flat, growing at 0.34% to $21 billion (imports surged 45% to $94.5 billion), while in the first quarter of fiscal 2023, exports to China slipped by a whopping 31% to $4.6 billion (imports grew 18% to $24 billion). China is India’s second-largest trading partner after the US.

With many countries adopting a “China plus one" strategy, it opens up opportunities for India. As Mint reported a few days earlier, developed economies from Australia to Canada to the European Union and the UK are forging trade partnerships with India.

It’s an opportunity for India to revive its manufacturing sector, but there are challenges ahead. A parliamentary standing committee noted last year that India is often not the first choice from companies looking to shift base outside China, and India has been left behind by countries like Vietnam, Taiwan and Thailand.

It observed that “the committee feels that the main challenges faced by the country presently are administrative and regulatory hurdles, inadequate and costly credit facility, tedious land acquisition procedure, inadequate infrastructure facilities, high logistics cost and large unorganized manufacturing sector, among others."

Elsewhere in Mint

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