Sunday 4 December 2022
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EconomyHow Chinese economic crisis can benefit India

How Chinese economic crisis can benefit India

While the world economy is jostling with inflation and rising interest rates, the Chinese economy may face a meltdown. Its banking system has turned rickety too. Depositors in China are rushing to banks to withdraw their money. This explainer explains how the Chinese economy, considered to be a global growth engine, got into this situation and how it impacts the global economy. More importantly for India, how can we gain from this?

How important is the Chinese economy to the world economy?

Following then-CPC general secretary Deng Xiaoping's switch to state capitalism, and more so since China joined the World Organisation in 2001, its economy has increasingly got integrated with the rest of the world. Over the years, the country became the hub of the global manufacturing and trading system, overtaking the US. 

Many multinational companies like Apple and have large production units in China. The Chinese share in world exports has grown four times from 4% in 2001 to 15% in 2021. In the same period, the American share declined from 12% to 8%. 

On the basis of purchasing power parity, China is already the leading world economy, ahead of the US.

The impact of Chinese on the world economy was seen during the Covid-19 pandemic when disturbance at the epicentre of the global supply chain of electronic products forced the world economy to aggressively adopt digitisation. Nevertheless, due to lockdowns and supply disruptions, there continued to be a large-scale shortage in electronic goods supply from China.

What caused the current Chinese crisis?

While China did not let its cities other than Wuhan get affected by Covid-19, the rate of infections spiked in its industrial hubs when the returned in the form of variants. The CPC government adopted a Covid-19 policy and imposed strict lockdowns in key cities such as Beijing and Shanghai. As a result, the Chinese economy is now slated to grow slower in 2022 and 2023. 

The International Monetary Fund (IMF) cut China’s 2022 GDP growth projection from 4.4% in its April 2022 outlook to 3.3% in the July 2022 outlook. The IMF has lowered China’s 2023 GDP growth projection from 5.1% to 4.6%, saying that "lockdowns and the deepening real estate crisis have led growth to be revised down by 1.1%age points".

Is Covid-19 the only culprit?

The reasons are older. Since the 2008 global financial crisis following the US subprime mortgage crisis, the Chinese government stimulated the economy on a large scale to counter the global slowdown. The government guaranteed that the banks could dole out credit, which led to a sharp spike in bank credit around 2008. The bulk of the credit was directed towards real estate and property. which led to a rise in prices. 

Economists warned that bank lending was not sustainable and would result in a crisis. The credit to GDP ratio, often seen as an indicator of a crisis, has been one of the highest in China.

In certain intervals, the prices declined sharply, as in 2011 and 2015. A banking crisis looked inevitable but the communist government averted it. The recent price decline is less sharp than what it was in 2011 and 2015, but it has turned into a crisis as the government is busy fighting Covid-19.

How will the crisis in China impact the world economy?

The IMF lowered 2022 growth projections for not just China but also the world economy from 3.6% to 3.2%, citing downturns in China and Russia as the main reason for the lower revision. The monetary agency explained that a slowdown in China "would have strong global spillovers"; if the Chinese supply declines, it would lead to higher consumer goods prices worldwide as seen during the pandemic. 

The fall in Chinese growth and demand could lead additionally to a reduction in the demand for commodities and intermediate goods supplied by other countries. This could lower the pressure of inflation but create issues for such economies that are dependent on exporting to China. 

The overall lower growth in the world might impact financial markets too. Mercifully, Chinese financial markets are not as well integrated with the rest of the world as their sector. Therefore, the cascading effect will remain confined to the trade channels. The financial markets will be impacted albeit marginally. 

This is unlike the US, whose highly inter-connected financial markets led to spillovers in the financial during the 2008 crisis.

What will India experience due to the Chinese crisis?

There are brighter and darker sides to the story. India’s with China, especially imports, has over the years risen sharply. In 2013-14, the Chinese share in India’s imports was 10.7%, which rose to 16.6% in 2020-21. 

The share of India’s exports to China has risen from 6.4% to 7.2% in the same period. India’s major exports to China are chemicals, mineral fuels, etc, whereas chief imports are electrical machinery, electronic goods, etc. 

The crisis in China will affect India’s sector. The imports from China are important for energy and growth whereas India’s exports are not as essential to China.

How can India benefit from the situation?

We can benefit politically more than economically.

On the economic front, India could turn the challenge into an opportunity by seeking imports from other countries, helping the country rely less on China in the near future. India may also build capabilities to make these products locally over a period of time.

The crisis in China provides an opportunity for India to project itself as a global manufacturing hub. India has a large young population seeking employment opportunities, and if one can bring global investment to India, it will be a win-win opportunity for all.

India may politically reposition itself as a power both at the Asian and global levels. Most south Asian economies — Sri Lanka, Pakistan, Nepal and Bangladesh — are facing crises. A majority of them are dependent on aid from China, which ends up seizing their assets, while China has not been of any financial help, as it is bogged down by its own crisis. 

Meanwhile, the world is wary of Chinese expansionism, as Beijing eyes both Taiwan and countries along the coast of the South China Sea. This is a political opportunity for India, which comes across as a benign giant.

India has been providing aid to all these troubled economies barring Pakistan, which could help the country assert itself in the region. The global polity has been unhappy with the state of affairs in China for a while now as it has turned increasingly autocratic. The global leadership has kept India on the sidelines all these years, but India can get its long-awaited status now.

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