China’s economic slowdown
China’s economy has grown at 6.9% in 2015 against the target of 7%. The growth rate was lower than the 7.3% and 7.7% growth rates in 2014 and 2013 respectively. This year, China’s economy is expected to grow at 6.5%. The growth data has created panic among investors and China’s stock markets were crashed in first week of January due to drastic sell-offs by investors.
China has been the world’s fastest growing economy in the last three decades with double-digit growth rates each year. But since last few years, China’s economy has been under stress and it is experiencing contraction and instability. China’s instability is threatening to push the world economy into another prolonged recession. Particularly, the emerging nations are at the receiving end.
Why is China’s economy slowing?
The main reason behind the China’s slowdown is the Communist Party’s decision to diversify the economy from public sector infrastructure and manufacturing to consumption, and from cheap exports to developing large domestic market. The efforts of China’s scholars have been directed to change the working style of the county’s financial system and to make it more closely aligned to the way Western banks and economies function. The government has also focussed on reforming the financial system by cracking down on corruption, prosecution of some high level officials, and many at lower level officials. This has created fear among investors and resulted in capital flight from markets. Since last year, whenever there is a stock market crash, the government instead of letting the markets to take their own course, it had intervened to prop up the market. Each intervention was only manages to be a temporary fix.
The main issues before China are:
Excessive debt
Every sector of China’s economy is suffering from excessive debt. Many large companies in China were dependent heavily on government subsidies. State-run Chinese banks provided credit to companies at artificially lower interest rates fuelling excessive debts across all sectors of economy. Many large scale developmental projects, which are funded by subsidized loans, are suffering from low profitability and weak capital productivity. The credit was given through a system called “shadow banking”, where credit products are sold directly to individuals. Public sector debthas grown to huge proportions especially at the local and regional level. The excessive debts are not allowing the banks to lend more to consumers and thus effecting the domestic consumption. The debt problem was further aggravated by the property bubble in 2014.
Demographic issues
China’s one-child policy worked well for it in the past to grow rapidly. Between 1980 and 2010, the effect of a favourable population age structure accounted for between 15% and 25% of per capita GDP growth. But now the demographic dividend was over. China’s population is expected to stabilise by 2030. It means there will be low workforce addition in the future. The population above 60 is also expected to double form present 180 million by 2030.The immediate economic consequence is that savings rate will decline as old-age burden increases.
Currency devaluation
China’s current economic turbulence started with the decision of authorities to devalue renminbi in August 8, 2015. China insisted that its currency devaluation was only aimed at aligning the currency’s value with the market demand. But it was alleged that China trying to take a larger share of export markets on the back of an undervalued exchange rate. The challenge before China in 2016 is to maintain reasonable yuan exchange rate stability under strong devaluation pressure. But given the China’s vast trade and financial linkages with the world economy, it is most challenging to manage the gradual yuan depreciation.
Environmental woes
For more than one decade China had grown at the cost of its environment. Now China has been facing the worst environmental crisis, which is threatening to undermine its economic growth.
In the coming years also, China may experience financial instability and low growth. If China wants to become a market economy, then it must learn to accept the market volatility that comes with any open market economy.
Effect of China’s slowdown on world economy and India
For decades, China’s economy had little interaction with the outside world and any changes in China’s economy had only a marginal impact on world economy. But today, its influence is everywhere. Given its sheer size and role on the global stage, any instability in China will create risk for the world economy. The impact will be more on countries that have grater trade ties with China. The biggest concern is for Asian countries, Australia, Brazil, Canada, Chile and Peru as they depend on demand from China for vital commodities for industry. In case of manufacturing, Singapore, South Korea, Malaysia, Hong Kong and Taiwan are most exposed.
Currently, lower international commodity prices, especially of oil, are helping Indian economy as India is a net importer. But India faces threat from its large and increasing trade deficit with China. China accounts for approximately one-tenth of India’s merchandise trade, and most of it comes from imports of goods by India. Given the size of imports, any sudden depreciation of yuan would impact the Indian trade negatively. Indian exports to China are less diverse and low size. Low demand from China will reduce Indian exports but the reduction is to such an extent that India may not be able to take advantage of the yuan devaluation to earn more dollars. India will also affected by China’s slowdown through third parties. When developing countries suffer from low exports due to less demand from China, their income will go down and they may reduce their imports from India as well. Thus, India must recognise the global economic scenario from China’s slowdown and take steps to increase domestic growth. At the same time, India should also explore the opportunities from Chinese slowdown.
