Moneycontrol Pro Panorama | China’s shadow on global manufacturing refuses to shorten

Applying the screws to imports will hurt a significant part of the economy, something the government may not want to do

Dear Reader,

Rising steel imports appear to have caught the government’s attention. India’s steel and trade ministries are in talks over the issue, according to a Reuters report, due to rising imports of steel, particularly from China. India’s steel companies have been demanding higher tariffs, according to the report, to protect domestic price realisations.

What’s more, the government has two considerations to evaluate. While steel producers may feel the pressure from imports, steel buyers such as automobiles, real estate and infrastructure/construction businesses are happy under these circumstances. Applying the screws to imports will hurt a significant part of the economy, something the government may not want to do.

But this problem may not just be restricted to steel but a number of other commodities and is tied to the surpluses generated by China’s companies. The government’s quandary in tackling this with an iron hand can be understood from this article by Manas Chakravarty.

He has pored through the Bank of International Settlements’ (BIS) Annual Economic Report to uncover this gem of an insight — rising imports from China have led to inflation coming down in many countries. India is one of the countries mentioned and it also benefits more because it is a commodity importer and lower growth in China has kept prices in check. What’s more, while rising imports have caused disinflation, since India is a domestic-focused economy, companies have not been hurt much by falling export realisations.

The PMI data being released today in some ways supports the continuation of this trend. China’s official data on factory activity showed a contraction for the second consecutive month in June. The index came in at 49.5 which indicates a contraction and was unchanged from May. The sub-index on new orders at factories indicated that demand had weakened. The non-manufacturing activity in construction and services too slipped.

However, the Caixin PMI index, which reports data for smaller and export-oriented firms, reported its highest reading since May 2021 and at 51.8 in June 2024 was higher than the preceding month’s number. On the demand front, though, both surveys point in a similar direction. The Caixin survey reported that new orders remained in expansionary territory, according to Reuters, but at a slower rate than the previous month. Demand for consumer and intermediate goods was stronger than for investment goods. The official survey, however, said the new orders index slipped to 49.5 due to weakening domestic demand.

What this signals is that while China’s factories keep humming, domestic demand for their products is not as strong as it used to be. The property sector’s situation has not really turned around, putting a lid on demand for the products that go into making a house and then fitting it out. These surplus goods then make their way into the global market, posing a question mark for their governments.

While it is good for inflation as Chakravarty’s article points out, it’s not all that good for domestic businesses that have import substitutes. While we may have tariff protection when Chinese companies are faced with a situation of sitting on unsold inventory, then even tariffs may not have the desired effect. Then, it comes down to non-tariff measures to bring imports down. The forthcoming Budget may offer some clues on whether the government will seek to do more to protect domestic industry from rising imports of Chinese goods. Otherwise, the domestic industry's animal spirits may get dampened, and may not support the case for a private capex recovery. However, the helping hand on the inflation front may make it easier for the central bank to cut interest rates.

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