China’s economic slowdown, its ripple effect

Source: The post is based on the article “China’s economic slowdown, its ripple effect” published in “The Hindu” on 2nd September 2023.

Syllabus: GS2- Indian Polity – Effect of policies and politics of developed and developing countries on India’s interests. & GS3- Effects of liberalization on the economy.

News: The article discusses China’s economic challenges, its shift from rapid growth to focusing on quality-of-life, political interventions in the economy, and the potential impacts on the global market, especially India.

What are the reasons for the economic slowdown in China?

Infrastructure Emphasis: China chose infrastructure projects over fixing core issues, neglecting consumption gaps and regional disparities.

Transition to ‘New Normal’: Growth from exports and major investments ended, shifting focus to quality-of-life, leading to lower growth rates.

Labor Cost Surge: Incidents like the Foxconn suicides resulted in wage hikes and more social security investments, raising production costs.

Sectoral Overproduction: Industries, especially housing, energy, and construction, produced beyond demand, amassing unsold inventory.

Political Economic Choices:

Capital Expansion Control: Xi Jinping’s mention of “Disorderly expansion of capital” after the Ant Group IPO issue signaled tighter control over capitalist activities.

Backtracking on Promises: Although the 18th Central Committee in 2013 suggested markets would play a greater role in resource allocation, many of these promises were later revoked. For instance, the government intervened when the stock markets tumbled in 2015 and tightened currency convertibility, locking savings longer due to speculations.

Ineffective Economic Strategies:

Saving Tendency: Chinese save over 50% of their income, impacting consumption.

Common Prosperity: Intended to distribute economic growth benefits more broadly but hasn’t reached leadership’s expected success levels.

Dual Circulation: Designed to boost domestic consumption and improve domestic market competitiveness while reducing bureaucratic red tape. Yet, the results haven’t been as effective as hoped.

Trade Wars & External Conflicts: The US-China trade tensions hampered trade dynamics.

Strict COVID Measures: The zero-COVID policy disrupted goods flow, causing economic disturbances and cash conservation.

What is the potential impact of China’s economic slowdown on India and the world?

Impact on India:

Reduced Commodity Prices: China’s slowdown could lead to decreased prices for commodities. For instance, China’s demand for crude oil, cement, and steel might drop.

Border Dynamics: Given the underlying economic tensions, China’s approach to its borders with India might shift. The exact nature of this shift remains an important issue to watch.

Impact on the World:

Trade Disruptions: China’s role as a major global trading partner means its slowdown can influence global trade dynamics. An example is the U.S.-China trade war that already strained economic relations.

Commodity Market Impact: A dip in China’s demand can affect global commodity prices. China’s previous role as a major market for commodities can lead to significant global price shifts.

Investment Cautiousness: The current atmosphere in China makes global investors wary. Recent data suggests companies are becoming more cash-conscious, potentially indicating a trend of increased saving over investing.

Economic Dependencies: Given China’s global economic influence, many countries might face challenges due to China’s slowdown.