The China traps

Source– The post is based on the article “The China traps” published in the “Business Standard” on 13th July 2023.

Syllabus: GS3- Economy

Relevance: Chinese growth story and lessons for India

News- There is some disconnect between how China’s position as an economic power is portrayed and its actual trajectory.

What is the current economic scenario in China?

The Chinese economy’s recovery from the effects of the Covid-19 pandemic has been weak. Retail inflation had fallen monthly. The Chinese economy is facing deflation, driven by low demand and shrinking manufacturing output.

Over 20 percent of the mainland’s workers under the age of 24 in China were unemployed. This is a higher rate than in most comparable economies.

What are simultaneous and interlinked economic traps faced by the Chinese economy?

One of these is the deflationary trap, where the economy struggles with declining prices and a lack of consumer spending.

Another challenge is the investment trap. Policymakers have limited options to stimulate growth and employment. They are mainly relying on increasing public investment.

However, the returns on additional investment are diminishing, and the country already has a high level of public debt.

To address these challenges, it would require a significant structural shift in the economy, such as promoting private consumption over fixed investment. However, the Communist Party is hesitant to undertake such changes due to the political implications they may entail.

China also faces the hurdle known as the “middle-income trap,”. It occurs when a country reaches a certain level of income and development but struggles to progress further.

The mainland’s youth unemployment problem is a manifestation of this trap. Tech and start-up sector, which could have provided opportunities for young people, is not growing at the required pace.

What are lessons for India?

The current scenario is a result of deliberate decisions made by Beijing. It holds significant policy implications for New Delhi.

The decline of China’s tech sector due to a crackdown enforced by Party officials serves as a reminder of the risks associated with politically motivated and arbitrary regulations.

India must exert greater efforts to establish its regulatory framework as independent and impartial.

It is crucial for India’s economy not to become overly reliant on public investment decisions. Maintaining fiscal responsibility and actively working towards reducing debt should also remain key priorities for India.