MC Explains | Why China is facing an economic crisis and how India can gain 

The impact of Chinese trade on the world economy was seen during the Covid-19 pandemic. Over the years, China has become the centre of the global supply chain of electronic products. The pandemic led to a huge surge in demand for these electronic products, as the world economy aggressively adopted digitalisation. However, due to lockdowns and supply disruptions, there has been a large-scale shortage in electronic goods supply from China.

What has led to the current crisis in China?

After a spike in infections, the Chinese government adopted a zero Covid-19 policy and imposed stringent lockdowns in key cities such as Beijing and Shanghai. As a result, the Chinese economy is expected to grow slower in 2022 and 2023. The International Monetary Fund (IMF) has cut China’s 2022 GDP growth projection from 4.4% in April-2022 outlook to 3.3% in July-2022 outlook. IMF has lowered China’s 2023 GDP growth projection from 5.1% to 4.6%. It stated that “lockdowns and the deepening real estate crisis have led growth to be revised down by 1.1 percentage points”.

Is there more to China’s woes other than the Covid-19-led slowdown? 

The seeds of current China’s problems were sown in the 2008 global financial crisis when the Chinese government gave a large-scale stimulus to counter the global slowdown. The government gave banks an implicit guarantee to dole out credit, which led to a sharp jump in bank credit around 2008. The bulk of the credit was directed towards real estate and property. which led to a rise in prices. The economists have been saying for a long time that bank lending was not sustainable and will result in a crisis. The credit to GDP ratio, which is often seen as an indicator of a crisis, has been one of the highest in China.

There were periods when the prices had declined sharply, as in 2011 and 2015, and a banking crisis looked inevitable but was averted by the government. Even the recent price decline is not as sharp as in 2011 and 2015, but it has turned into a crisis as the government is busy fighting Covid-19.

What does the Chinese crisis mean for the world economy?

IMF has lowered 2022 growth projections for not just China but also for the world economy from 3.6% to 3.2%. It has cited downturns in China and Russia as the main reason for the lower revision. The IMF has added that a slowdown in China “would have strong global spillovers”. If supply from China declines, it could lead to higher consumer goods prices worldwide as seen during the pandemic. The decline in Chinese growth and demand could also lead to lesser demand for commodities and intermediate goods supplied by other countries. This may lower inflation pressure but create problems for the economies which are dependent on exporting to China. The overall lower growth in the world could impact financial markets as well. The saving grace is that Chinese financial markets are not as well integrated with the rest of the world as its trade sector. So the spillovers will remain limited to the trade channels. The financial markets will be impacted but marginally. This is unlike the US, whose highly inter-connected financial markets led to spillovers in the financial channel as seen in the 2008 crisis.

What does the Chinese crisis mean for the Indian economy?

The Chinese crisis provides both challenges and opportunities for the Indian economy. Over the years, India’s trade with China, especially imports, has risen sharply. In 2013-14, the Chinese share in India’s imports was 10.7 percent, which rose to 16.6 percent in 2020-21. The share of India’s exports to China has risen from 6.4 percent to 7.2 percent in the same period. India’s major exports to China are chemicals, mineral fuels, etc, whereas chief imports are electrical machinery, electronic goods, etc. The crisis in China means India’s trade sector could be impacted. While India’s exports are not as essential to China, the imports from China are important for energy and growth.

India could convert this challenge into an opportunity by seeking imports from other countries. It will help India rely less on China over the years. India could also build capabilities to make these products locally over time. In fact, the Chinese crisis provides an opportunity for India to project itself as a global manufacturing hub. India has a large young population seeking employment opportunities, and if one can bring global investment to India, it will be a win-win opportunity for all.

How can India benefit politically from the situation?

Apart from converting economic challenges into opportunities, India could also reposition itself as a political power both at Asia and the global levels. The majority of the South Asian economies – Sri Lanka, Pakistan, Nepal and Bangladesh – are facing crises. Most of them have been dependent on aid from China, while the Chinese have not been of any financial help given their own crisis. India has been providing aid to all these troubled economies barring Pakistan, which could help the country assert itself in the region. The global polity has been unhappy with the state of affairs in China for a while now as it has turned increasingly autocratic. The global leadership has kept India on the sidelines all this while and it has to be seen whether India can get its long-awaited status this time around.