What a slowing China means for India

What a slowing China means for India

Subject :Economy

Section: External sector

In News: Government has initiated work on drafting policies to make India a global hub for sourcing sustainable and circular textiles and garments.

Key Points:

• The latest economic data show that the world’s second largest economy has slipped into deflationary mode.  Both retail sales and industrial production missed forecasts in July.
  • According to the National Bureau of Statistics (NBS), retail sales in July grew 2.5 per cent year-on-year, compared to a 3.1 per cent in June, and value-added industrial output expanded by 3.7 per cent y-o-y, slowing from the 4.4 per cent growth witnessed in June.
  • China’s exports fell by 14.5 per cent in July compared with a year earlier, while imports dropped 12.4 per cent.
  • And overall unemployment rate had risen to 5.3 per cent in July. Youth unemployment, a keenly watched indicator, hit a record 21.3 per cent in June.  China’s debt is now estimated at 282 per cent of GDP, which is more that of the US.
• The most worrying aspect is shrinking domestic demand. The prices of apartments and a range of goods and services have fallen, with the Consumer Price Index-based inflation dropping by 0.3 per cent after flatlining (i.e. – 0.3 %) in June.

Why China facing deflation?

• • Chinese economy is currently facing a crisis of confidence. Several factors has led to this.
  • The major one is the near collapse of the decades long debt-fuelled housing sector, which contributes to about 30 per cent of China’s GDP.
  • The country’s protracted and stringent lockdown — shutting schools, offices, parks, etc — all but choked the domestic economy.
  • It created global supply-chain upheavals as well. These, along with geopolitical tensions, triggered manufacturing relocations, weakening domestic growth and consumer spending further.
  • Government’s crack down on its vibrant tech sector – video gaming, edtech, e-commerce — on the grounds that the tech companies were getting too big and powerful. This has resulted in huge losses of revenues and jobs, as many of these firms had to downsize or shut shop.
  • Amidst the declining and uncertain economic environment, Chinese investors and households are cutting back on spending, leading to a deflationary situation.
• Impact on the world economy?
  • A slowdown in China will affect global demand. Not only is China the world’s largest manufacturing economy, but it is also the largest consumer of key commodities. It accounts for almost half of the world’s metal consumption.
  • A cut in prices of Chinese manufactured goods could impact employment by way that it could hit investment by businesses.
  • A period of falling prices in China could also hit company profits and consumer spending. This may then lead to higher unemployment overall.

Is a slowing China good or bad for India?

• India is hoping to compete with China as a major player in the global supply chain and as a manufacturing hub. It has unveiled schemes like PLI (Production Linked Incentive) to boost domestic manufacturing. India’s China plus strategy can get a boost if Chinese exports taper down.
• If China begins exporting base metals and other commodities at reduced prices, due to slowing demand, it could benefit our manufacturers. On the other hand, if Chinese producers begin cutting back on production of metals and other commodities due to slowing domestic demand, it will push commodity prices higher.
• If investment in the Chinese economy is lowered owing to the increasing slowing rate of their economy, and now deflation, India could potentially emerge and take over as the manufacturing hub for the developed economies. This is also something the developed countries seem to have been pushing for in a bid to eliminate the monopoly-like hold China has over the manufacturing sector (China plus strategy).