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Last Updated : May 11, 2020 06:21 PM IST | Source: Moneycontrol.com

Politics | What a slowdown in China means for the world and India

The expected transition in the Chinese economy provides many new opportunities for India in the areas of manufacturing, infrastructure building as well as new linkages with the world’s second-largest economy.

Representative Image
Representative Image

In the last few days there has been a lot of discussion on the news that the Chinese economy has registered only 6.2 per cent growth in the second quarter of 2019. This is the slowest growth recorded by the world’s second-largest economy in almost three decades.

United States President Donald Trump was quick to take the credit saying that the imposition of new US tariffs are having its effect on the Chinese economy. In response, the Chinese authorities asserted this is not a ‘bad performance’ considering slower global economic growth and it is within the annual target range of 6-6.5%.

Although 6 per cent-plus growth is pretty impressive for a $13 trillion economy, yet this looks small because we are talking about China. For more than three decades, Chinese economy has performed either double-digit growth or one of the highest growth rates in the world.

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The high economic performance has also been one of the main factors responsible for communist regime’s legitimacy. For years, the world is used to the narrative of the rise and rise of China. The Chinese policy makers also followed Deng Xiaoping’s advise, “development is the only hard truth”. In 2019, the Chinese economy is 42 times larger than what it was in 1980. In the last 10 years, China has also been a major contributor to global growth.

China will continue to rise. However, the rise in the coming years will be different.

The country is entering a new growth trajectory and the era of high-speed growth is perhaps over. Since the economic base is very large, a medium to high growth (5-6 per cent) in the coming years should be a new normal. To be fair, China in its 13th Five Year Plan (2016-2020) had targeted only 6.5% growth. Despite global conditions and trade war with the US, they are not terribly far behind.

Future growth is going to be dependent more on productivity rather than just expansion of factors of production. Despite introducing various economic reforms, many countries in the erstwhile Eastern Europe floundered during this stage. However, Chinese transformation to a market economy has been remarkably different and successful so far.

China is already an upper middle-income economy. After reaching this stage, many countries also got trapped in ‘middle-income trap’. After initial high growth, many nations have stagnated at this level and never managed to make a transition to a high-income economy.

All these dangers are real. However, China has so far defied many theoretical formulations. All indicators show now that the economy is slowing down. Challenges pointed out by analysts include increasing labour cost, rising debt, a housing bubble, an ageing population and now a trade war with the US.

As China is trying to move up the global value chain, industries related to textiles, shoes, toys etc. are already moving into countries such as Bangladesh, Cambodia and Vietnam. Due to its own structural problems, India has not been able to take much advantage from this restructuring.

The two-stage development plan set out at the 19th Party Conference talked about building foundations for a modern economy (2020-2035); and China with a substantial global influence (2035-2050). In the initial phase, technological development is going to be extremely critical.

Realising this, China is spending huge resources on R&D and education. Some studies have pointed out that Chinese R&D spending is more than Germany, Japan and South Korea combined. The Chinese are already becoming serious players in several aspects of technologies related to 5G, aerospace, artificial intelligence and robotics. As State intervention has strengthened under Xi Jinping, inefficiency (or efficiency) of State-led innovation spending may play a determining role in future growth.

Another push for growth is expected from the ‘going out’ policies under the Belt and Road Initiative (BRI). This is also linked with the strategy of enhancing global influence in the long run. Three decades of growth has also produced a large middle class. China is also focussing more on the domestic market. Due to tensions with the US, It may also try to diversify trade partners.

Changes in the quality of growth will have a negative price impact on global energy, metals and raw material markets. So the commodity markets may come under pressure. Indian exports such as minerals, copper and chemicals may be affected. The slowdown may also affect foreign goods purchased by Chinese consumers.

The expected transition in the Chinese economy provides many new opportunities for India in the areas of manufacturing, infrastructure building as well as new linkages with the world’s second-largest economy. This however, will need deepening of our own economic reforms and changes in geopolitical thinking about China.

Gulshan Sachdeva is Jean Monnet Chair at the School of International Studies, Jawaharlal Nehru University and editor-in-chief, International Studies. Views are personal.
First Published on Jul 19, 2019 12:29 pm
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