Issues in a country can have a rippling effect felt by its neighbours and countries far across the globe. The reason behind this is globalisation, which doubtless, has its benefits but has also increased the linkage and dependencies between countries.
For example, Sri Lanka’s economic turmoil, which began in 2019, negatively impacted the businesses of Indian companies such as Reliance, Ashok Leyland and Tata Motors, but also opened more doors for India in the tea market. Because of the crisis, Sri Lanka’s primary tea exports fell significantly, and India took this opportunity to fill this gap in the global market.
Similarly, China’s economic slowdown is causing shock waves not only in the country but also across the global economy. Here’s a detailed picture.
Why Is China Facing An Economic Slowdown?
The two main reasons China is facing an economic slowdown are the crises in its real estate and banking sectors, which contribute most to the country’s GDP.
The real estate crisis, contributing to 30% of China’s GDP, is causing a fast economic deceleration. It started during the early 2000s, when urbanization was at its all-time high forcing developers to take large amounts of debt to meet the rising demand. Thus, causing house-price inflation and overbuilding. For instance, the price-to-income ratio in Beijing is a whopping 56 years, implying that a 56-year median household income is needed to buy an apartment there.
The Chinese government launched the ‘Three Red Lines Policy’ to curb the debt real estate developers could take on. However, big companies such as Evergrande breached all the rules and regulations and have become debt-ridden. There are countless unfinished projects, which if failed, would result in a terrible financial crisis for 171 domestic banks, suppliers and homeowners.
The second reason, a looming banking and credit crisis is another cause behind the country’s approaching economic stagnation. Post the 2008 global financial crisis, shadow banking in China increased manifold. Unregulated financial institutions started providing loans at exorbitant interest rates in the business and real sectors.
Small and medium enterprises (SMEs), which contribute to around 50% of the economy, are also in a frenzy due to cash deficits and rigid lending policies adopted by the banking system.
Read More: China Gives ‘Ukraine-Like’ Warning To Asia; Don’t Let ‘Tragedy Be Repeated,’ Say Reports
But How Is It Affecting The World?
China is the world’s second-largest economy, after the United States of America and contributes majorly to the world GDP (Gross Domestic Product).
George Magnus, an economist at the Oxford University’s China Centre said, “Mathematically, yes, China accounts for around 40% of global growth.”
A 2023 paper by the IMF (International Monetary Fund) revealed that even a 1% point decline in China’s growth rate could reduce growth in Sub-Saharan Africa by 0.25 percentage points.
Since China is the second largest exporter of goods in the world, problems in its industries are ultimately disrupting the global market as well. It is also one of the biggest sources of demand, with 16% of the world’s oil demand coming from the country.
Countries like Australia and Brazil rely heavily on their exports of iron ore and copper to China and are now facing severely low demand, thus bracing for the possibility of an economic slowdown in their country. Roland Rajah, director of the Indo-Pacific Development Centre at the Lowy Institute in Sydney said, “Big exporters such as Australia, Brazil and several countries in Africa will be hit hardest by this.”
“If Chinese people start cutting back on eating out for lunch, for example, does that affect the global economy? The answer is not as much as you might imagine, but it certainly does hit firms who directly rely on domestic Chinese consumption,” said Singapore’s executive director of the Asian Trade Centre, Deborah Elms.
China’s involvement in the technology and electronics industry is the backbone behind sending shock waves worldwide. The supply of smartphones, computers, chips and other electronic items faces severe disruptions. This will lead to a sharp rise in prices in developing nations as they depend on China for one-fifth of their total imports of most products.
An MSCI index, that tracks global companies with a tantamount exposure to China, has slugged by 9.3% as companies like Nike, Hermes and Gucci are hit by the slowdown.
How Will It Affect India?
As the Chinese economic slowdown could pull down global growth, it might not be as harmful to India.
The chief economist at the Bank of Baroda, Madan Sabnavis, said, “Global growth will be affected by China’s slowdown as it will affect trade. India not to be affected much as we are more of domestic economy.”
“Negative impact on growth could be curbed by softer commodity prices that are intricately linked to China’s economic cycle also and these need to be taken into account as well,” said Abhishek Upadhyay, a senior economist at ICICI Securities Primary Dealership.
Moreover, China’s aging population has decreased the labour supply. This is a silver lining for labour-intensive nations like India more so because Western nations are diversifying their supply chains.
In a report called ‘China Slows India Grows’ S&P Global Ratings have predicted a shift in Asia’s growth from China to Southeast Asia. As India is set to become the third largest economy in the world, it is expected to replace China as the global factory.
“A paramount test will be whether India can become the next big global manufacturing hub, an immense opportunity. Developing a strong logistics framework will be key in transforming India from a services-dominated economy into a manufacturing-dominant one,” said S&P.
According to the bill of lading figures revealed by Reuters, the biggest retailer in the world, Walmart has already shifted its imports from China to India, intending to cut costs and diversify the supply chain.
While China’s economy is going down, India is undertaking capacity-building to fill the gap in the world market.
Image sources: Google Images
Sources: Insighteye, The Economic Times, Moneycontrol
This post is tagged under: China, economic slowdown, ripple effect, USA, world, global, S&P, economy, capacity building, India, Asia, Southeast Asia, Reuters, Walmart, labour-intensive, Western, GDP, Reliance, Ashok Leyland and Tata Motors, Sri Lanka, supply chain disruptions, market, real estate, Beijing, debt, banking, three red lines policy, Australia, Brazil, sub-Saharan Africa, Gucci, Nike, Hermes, MSCI index, IMF, SME
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