The Big Impact Of China’s Slowdown

China’s economic slowdown in 2015 will have important consequences for countries in the region and beyond. After three decades of double-digit growth, however, the weakening performance of the world’s second-largest economy is a significant source of concern—and not just for the Chinese.

About Chinese crisis:

•  Chinese crisis is mainly highlighted with fall in stock market and devaluation of yuan.
•   Since 2010, Chinese authorities have eased restrictions on using borrowed money to invest in shares.
•  Retail investors, who account for about 85% of trade in China, made risky investments often bypassing rules.
•  Estimates say that borrowed money helped push the stock market 150% since June last year. This created a huge bubble around the Chinese stock market which was driven by borrowed money.
•  Also, China’s slowdown is being driven largely by shrinking labour force and rising labour costs.
•  So, when China's securities regulator put restrictions on it ,  Chinese stocks started  falling
•   Recently, due to crisis in Europe, Chinese export to European nations falls . There is also a huge fall of overall Chinese export this year. China devalued its currency so that it can infuse more money to exporters which lead to cheap export. This devaluation helps Chinese export driven economy to come out of the crisis.
•  There was  huge anticipation of Federal Reserve hike in interest rate. So, China devalued its currency as a possible measure as shock absorber.
•  China wanted to get yuan into “SDR”, which is foreign reserve maintained by the IMF in Dollar, Pound, Yen and Euro. But Chinese currency is not yet fully market driven and transparent. The Chinese central bank wanted to have market driven currency exchange rate. This also results in devaluation of the Yuan. Finally in the end of the year IMF agree to add “yuan” in SDR basket.
•  The Chinese economy is an export driven economy. China wanted to shift it toward consumer oriented industry. There is less consumerism in China. So this devaluation leads to more money to the people, which might increase consumer consumption.

Impact on World Economy:

•   China is the second biggest economy in the world. It has huge investment all over the world.
•  Devaluation leads to less import of China, which affects prices of commodities like Crude Oil, Gold, Metal and Agriculture goods. China is the third largest importing nation.
•  Debt ridden countries will suffer great loss. Because due to less investment, less growth and lower wages, less inflation. And this leads to suffering of borrower country.
•  Countries that produce raw materials, such as copper, oil and minerals, for manufacturing in China are already seeing the biggest changes. China’s industrial slowdown means a corresponding reduction in world demand for these commodities. Countries such as Kazakhstan and Chile, whose economies are heavily concentrated in such sectors, are finding the contraction a serious challenge.
•  But some countries also gained from this slowdown. Vietnam, for example, has greatly increased its production and exports of smartphones and consumer electronics—an area where China used to enjoy absolute dominance—partly by attracting more foreign direct investment

Impact on India:

•  Indian corporate investment in China will suffer like Automobile.
•  India is one of main importer of Chinese goods. So in case China’s export will get cheaper it will be beneficial to India. But cheap export can also affect local industry.
•  China is not a major import partner of India. But if China crash lands, it would hit many companies that have a significant manufacturing base in China, especially US based companies. When US based companies are affected, contract for Indian IT services from US companies may shrink. It also leads to a pull-out of money from Foreign Portfolio Investors in India, which can then lead to a fall in the Indian stock markets and also the Indian rupee.

Gain for India:

•  India is going to be fastest growing country by surpassing china. So this crisis also shifts investors from China to India.
•  India is a domestic consumption story. India is not an export driven economy like China. India produces and consume by itself.
•  India is the youngest country in term of manpower.
•  Fall in prices of crude oil and gold help India to maintain less current A/C deficit.
•  But India have to reform its economy by tax reforms, land reforms, labor reforms and disinvestment in Indian bank in order to raise more capital.

As China’s slowdown is being driven largely by fundamental factors (especially a shrinking labour force and rising labour costs), it should be understood as part of a new normal for the world economy. Because the Chinese economy is so much larger now, even 6% growth today would contribute more to world output than 10% growth before the global financial crisis.For other countries, the best way to cope with a slowing China is to embrace the domestic reforms needed to reposition themselves within the global economy.

Dilaing……mains(General Study II: Effect of policies and politics of developed and developing countries on India’s interests)

By: Parveen bansal