How bad is China’s slowdown, and how will it affect India?

China’s slowness is also hurting India in the near future. India is facing a sharp decline in exports to its neighboring countries and a widening trade deficit as demand in China has slowed down.

Why is the Chinese economy slowing down?

China has had an unbelievable zero-Covid policy from the beginning. It has responded with strict lockdown and stringent quarantine measures to keep the pandemic under tight control. It initially helped contain Covid, and its economy recovered rapidly in 2020, but lockdowns in recent months have dented economic momentum.

In July, the New York Times, citing Nomura Securities, reported that the COVID lockdown affected 247 million people in 31 cities. This is about 20% of the national population, accounting for about $4.3 trillion in annual GDP. As a result, household consumption has fallen sharply, and unemployment figures are worryingly high.

This slowdown has already taken a toll on China. Remember, China claimed to end extreme poverty in 2021, but its stringent COVID lockdown has worsened living standards, and millions of people are at risk of slipping into poverty again. In many ways, this is a similar crisis as India faced during the Covid-induced lockdown – small and medium enterprises (SMEs) were the hardest hit.

Consider the scale of the problem. According to the OECD, there were over 140 million SMEs and the self-employed in China in 2020. They contribute 60% of total GDP, 50% of tax income, 79% of job creation and over 68% of exports. According to business data and analytics company Kichacha, at least 3 million small businesses were shut down between January and November 2020. The study has been cited extensively by Chinese and Hong Kong media. According to media reports, about 4.37 million small businesses closed their shops between January and November 2021. These developments will clearly test China’s resolve to prevent its working class population from falling into poverty again.

How is China responding to the recession?

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

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 by cutting its lending rates to stimulate demand.

Meanwhile, Chinese state media has defended the country’s zero-tolerance of COVID, arguing that it has created a safe and stable environment for China’s development and the world. While cases continue to decline in China, it also reported more than 1,500 infections on Wednesday.

How serious is the real estate crisis?

China also has to deal with a very serious real-estate crisis. The housing market has been hit by a funding crisis that has put several projects on hold, with more than hundreds of groups of homebuyers refusing to pay their mortgages.

You might also like

Unproven, unregulated, creep in facial recognition technology

Why we should welcome Coldplay’s climate play

Hero Electric in talks to raise $250 million

How has the dynamics of Nifty changed with FIIs?

These real estate projects were sold through the presale system, an accepted practice in China. Here, buyers deposit money for their home in an account, and Chinese banks and authorities monitor the end use of these funds by builders. Many buyers now believe that builders have illegally pumped this money into new projects without completing their existing undertakings. As a result, the government tightened real-estate regulations in 2020, limiting the debt levels of developers, leaving many of them bankrupt.

Concerns remain that a real estate downturn will affect the balance sheets of banks, whose assets are parked in about 25%, impacting household budgets and consumption, and bankrupting many small businesses that consume consumption. feed to. But the crisis is yet to be compared to the subprime mortgage crisis of 2007 in the US, where many homebuyers were unable to repay their home loans – experts believe the Chinese middle class has no better way to deal with the crisis. There is enough savings for

Still, there are concerns that the real estate shock could force banks to become conservative lenders and that local authorities, deprived of revenue from land sales, could cut spending on infrastructure and development projects, further boosting the economy. can slow down.

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

As we said, the Chinese economy will affect global inflation in two ways – the price of manufactured goods will rise while the pressure on commodity prices will ease. China, the factory of the world, is the world’s largest consumer of a wide variety of commodities, from oil and steel to wheat and soybeans.

China accounts for more than 18% of global GDP – more than the combined GDP of the European Union and accounts for about a third of global manufacturing.

It is the second largest economy in the world, and its troubles affect the whole world. While the lockdown has worsened supply chain constraints for the world, faltering demand in China has hit the operations of some of the world’s largest corporations.

The IMF has already warned that the imbalance in supply and demand due to the lockdown in China will worsen inflationary pressures in the world.

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

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

Meanwhile, Bloomberg reported in July that “China’s economic slowdown is exacerbated by falling demand for manufactured goods in major exporting countries in Europe and East Asia, leaving Germany and South Korea with the world’s second-largest economies to share scarce deficits.” posting.” majority. China’s imports are products manufactured for its local market and also as inputs for exported products.

In fact, this is a story that has played out in India as well. The Chinese slowdown has substantially increased India’s trade deficit with China. In FY 2021-22, India’s exports to China remained flat, growing 0.34% to $21 billion (imports increased 45% to $94.5 billion), while in the first quarter of FY2023, exports to China declined by 31%. Turned out to be $4.6. billion (imports rose 18% to $24 billion). China is India’s second largest trading partner after the US.

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

This is 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 among companies shifting bases outside China, and countries such as Vietnam, Taiwan and Thailand have outperformed India.

It observed that “the committee feels that the main challenges facing the country at present are administrative and regulatory constraints, inadequate and costly credit facilities, tedious land acquisition process, inadequate infrastructure, high logistics cost and large unorganized manufacturing sector.”

Elsewhere in Minto

Sajjan Jindal explains what he is doing at JSW Steel in the polldecarbonized steelmaking, Althoughfood inflation Has gone downstairs, Himanshu tells you what could be wrong. Anjani Trivedi and Shuli Ren argue why it ain’t easy to removechina manufacturing mojo, long story tells howIndia’s biggest music label She is also trying to make her mark in films.

first article