Chinese Economic Slowdown: Impact on World / India

Chinese economic slowdown is a reality and it will have significant impact on the world as well as India. Let us analyse the topic: Chinese Economic Slowdown: Impact on World/ India.

Chinese Economic Slowdown is a Reality & will continue

Facts  show that the Chinese economic slowdown is a reality and double digit growth is unlikely in the near future. The growth is likely to remain below 7%. Let us see the major issues.

  • Labour.  Labour has reached a saturation stage.  Urban migration has slowed dramatically to about five million a year. The population is aging, owing to the one child norm enforced in the past. Only five million Chinese will enter the core working ages of 35-54 in this decade, down from 90 million during 2000-10.Growth in manufacturing needs labour. There are chances of labour migration from Nepal, Bangladesh, Myanmar and other countries to fill the gap. Overall  the availability of labour is likely to decline. This factor alone will cause Chinese economic slowdown.
  • Wage Inflation. Annual wage inflation is at 15%. This symptom had slowed the other Asian miracle economies and is affecting China now.
  • Debt.  The $2.5 trillion in foreign currency reserves suggests that China is a big creditor. The debt of households and corporations amounts to 130% of GDP. The current annual deposit rate is 2.25 per cent, and lending rate is 5.1 per cent. The bad debts of banks are very high. It will take time to resolve the problem.
  • Public Debt. The high government expenditure in infrastructure had helped China sustain growth during the 2007-08 Global crises. The current government debt is 120% of GDP. This is unsustainable.
  • Infrastructure & Real Estate. Investment in infrastructure and real estate last year was about 49% of GDP. This is extremely high. Construction activity in China last year was more than US and Europe put together. This was a major aspect fuelling the growth. Demand for real estate has declined and infrastructure growth is unsustainable. This is another major factor which has caused Chinese economic slowdown.
  • Share Market. The share market is overvalued. The Chinese private investors have taken bank loans and invested in the market. The market is falling and has to decline.
  • Political Unrest. Reduced economic growth may cause political turmoil. The positive aspect is that household incomes are rising and with low inflation rate, domestic demand will rise for some time. Thus domestic consumption will rise and exports reduce.
Chinese Economic Slowdown: Impact on the World
  • Commodity Prices & Commodities’ Exporters to China. China’s imports of commodities will decline. Thus exporters of steel, copper, cotton and other commodities would be adversely affected. The prices of commodities, including oil are hence likely to stay down. Countries like Australia and some African countries will suffer because of this Chinese economic slowdown and will have to seek alternative markets. This is a major impact on the world.
  • Slowdown of World Economy. Being the second largest economy, China’s contribution to the world’s economic growth last year was approximately 33 %. Thus Chinese economic slowdown would reduce growth in the world’s economy in the short term. This may not remain so in the long run. Investments and manufacturing would increase in places with cheap labour, like India, Bangladesh, Sri Lanka, Myanmar, Philippines and Vietnam. The world economy would stabilize and growth sustained by other developing countries. It is also a major impact on the world.
  • China’s Image as the Global Manufacturing Hub. The slowdown in EU, Japan and South Korea has reduced the demand for Chinese goods. The manufacturing industry is predominantly export oriented. China’s image as the Global manufacturing hub may change. She may  lose her preeminent position and other countries may fill the vacuum. This will take some time. There are also chances of labour migration to China. The future scenario is not totally clear.

Chinese Economic Slowdown: Impact on India: Positives

  • Oil prices will continue to remain low. India being an importer of 80% of her needs will have to spend less on the import bill, thus improving the balance of trade position. This will reduce fiscal deficit. The savings could be utilised to increase public capital expenditure to improve infrastructure and promote growth and employment.
  • Circumstance are suitable for the success of ‘Make in India’ and attraction of FDI.
  • Low prices of commodities like steel will lower the cost of infrastructure development.
Chinese Economic Slowdown: Impact on India: Negatives
  • Commodities’ exporters like steel, cotton, iron ore will be negatively hit as prices will remain low and Chinese demand decline.
  • Households will be affected by reduction in availability of cheap Chinese goods.
  • The short term negative impact on world growth rate would have minimal impact as India’s growth depends largely on domestic demand rather than exports.

Conclusion

Chinese economic slowdown is a reality to which the world will adjust in about a decade. The surplus credit available in the world will have to be invested in new, productive markets. It will have some negative impact on India, but the opportunities appear to be more than the threats!

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Colonel M.M Nehru

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