The reason behind the Chinese economic crisis and its global impacts. How can India benefit from it?
Chinese economic crisis, reasons and impacts: The global economy was already worried about rising interest rates and high inflation when another concern surfaced. There are fears of the economic collapse of the Chinese economy and its banking system.
Depositors are losing sleep over the impending crisis and therefore preparing to withdraw their money.
With China being an engine of global growth, it is hard to believe that the country has landed in such a crisis. Before diving into the reasons, let’s first consider the importance of the Chinese economy and how it contributes to the world.
The Chinese economy and its importance
China’s accession to the World Trade Organization in 2001 led to its integration with the rest of the world. In recent years, China has overtaken the United States as the center of the global trading system. Huge global giants like Tesla and Apple have their manufacturing base in China.
Speaking of China’s share of world exports, it quadrupled from 4% to 15% last year. On the contrary, the United States saw a decline in the percentage.
China surpasses the United States in another aspect. It has become a leading world economy according to the purchasing power parity parameter.
However, while the Covid 19 has been a big shock for the whole world, the Chinese economy has also suffered. Today, China is the center of the global electronics supply chain.
In the wake of the pandemic, the world has gone digital, which has led to a surge in demand for electronics. Thus, blockages and interruptions in supply have made it impossible for China to meet these demands, leading to a large-scale shortage of its electronics supply.
Reasons for the current collapse of the Chinese economy
The Covid-19 outbreak has seen a huge escalation in infections and so the Chinese government has imposed a tough lockdown in cities like Shanghai and Beijing.
It is estimated that the strict containment measures could slow down the Chinese economy in 2022 and 2023. The International Monetary Fund (IMF) has lowered the Chinese GDP growth projection from 4.4% in the outlook for April 2022 to 3, 3% in the outlook for July 2002. . It also cut the country’s GDP growth projection in 2023 from 5.1% to 4.6%.
Other underlying issues
The Covid-19 pandemic has only added to the already existing problems in the Chinese economy. The problems have their roots in the global financial crisis of 2008.
Meanwhile, the banks received an implicit guarantee from the government to distribute the credit. This resulted in a huge increase in credit back throughout the year. Most of the credit went to property and real estate, driving up prices. Economists have repeatedly worried and warned that bank lending will lead to a crisis.
In 2011 and 2015, there was a sharp drop in prices. In such a scenario, it seemed that the banking crisis became inevitable, but the government avoided it.
Now, as China is busy battling the repercussions of Covid-19, economic crisis seems inevitable.
The Chinese Economic Collapse and the Rest of the World
It would be wrong to say that only China’s growth projections for 2022 have been revised downwards by the IMF. The organization cut the global economy’s growth projections for 2022 from 3.6% to 3.2%.
The main reason for this downward revision is cited in the Chinese and Russian slowdown. Moreover, according to the IMF, a Chinese crisis will have strong global spillovers.
If there is a slowdown in the supply of goods from China, it could lead to higher prices for goods to customers around the world, a scenario the world has already witnessed during the days of Covid-19.
Moreover, if there is a drop in Chinese demand for supplies around the world, then, too, countries that are heavily dependent on exports to China will suffer.
All in all, the weaker growth in the world would have a negative impact on the financial markets. However, the fact that China’s financial markets are not very integrated with the rest of the world, unlike its commercial sector, comes as a relief. Therefore, it can be said that the fallout will affect trade channels, but financial markets may not be as affected.
The Chinese crisis and the Indian economy
The Chinese crisis can be both a blessing and a curse for the Indian economy. Recent years have seen an increase in imports from China to India.
For example, in 2020-21, China’s share of India’s imports increased from 10.7% in 2013-2014 to 16.6%. During the same period, India’s export share also increased from 6.4% to 7.2%.
India mainly exports mineral fuels and chemicals. On the other hand, India mainly imports electronic products, electrical machinery, etc.
Needless to say, a collapse of the Chinese economy will also prove bad for India’s business sector.
However, with every challenge comes an opportunity and here too, India can take advantage of the hidden opportunity. When imports are likely to be affected, it will not be a bad idea for India to seek imports from other countries.
This will help India become less dependent on Chinese imports in the near future. Moreover, it is also a great opportunity for India to present itself as a global manufacturing hub. This will significantly boost Indian employment.
Political Opportunities for India
China’s economic collapse is also a great chance for India to position itself as a political powerhouse in Asia and the world. Most South Asian economies, including Sri Lanka, Nepal and Bangladesh, are the hardest hit by the crisis.
While these countries are still hoping for help from China, India can be of great help to these countries, thus asserting itself in the region. It can help India get the status it has always been waiting for.