How India can benefit from China’s economic crisis
How India can benefit from China’s economic crisis
Due to the strict containment measures imposed by the Covid-19 in the main manufacturing centers, there are fears of a collapse of the Chinese economy and banking system. A Chinese crisis offers India a chance to position itself as a global manufacturing hub.
Global economies are facing high inflation and rising interest rates while dealing with another shock. Chinese banks and economy are in danger of collapsing. Several reports indicate that Chinese depositors are rushing to withdraw their money from banks in anticipation of an impending crisis. China’s economic growth is seen as an engine of global growth. How did it get there and what impact does it have on the global economy? Moneycontrol explains.
What is China’s place in the global economy?
In 2001, China joined the World Trade Organization, which led to greater integration of its economy with the rest of the world. As a result, the country has overtaken the United States as the center of world trade. Apple and Tesla are among the global companies with large factories in China. Between 2001 and 2021, China’s share of world exports has quadrupled. On the other hand, the share of the United States fell from 12% to 8%. The United States has been overtaken by China as the world’s largest economy based on purchasing power parity.
A recent pandemic has shown the impact of Chinese trade on the global economy. The global electronics supply chain has centered on China over the years. Due to the pandemic, the global economy has aggressively embraced digitalization, leading to an increase in demand for these electronic products. China’s supply of electronics has been severely disrupted by blockages and supply disruptions.
Why is China facing a crisis right now?
In key cities such as Beijing and Shanghai, the Chinese government imposed strict lockdowns after Covid-19 infections spiked. Thus, Chinese economic growth is expected to slow in 2022 and 2023. China’s GDP growth projection in 2022 has been reduced by the International Monetary Fund (IMF) from 4.4% in April 2022 to 3.3% in July 2022. According to the IMF, China’s GDP growth for 2023 will be 4.6%, down from 5.1%. The IMF noted that there will be 1.1 percentage points less growth due to closures and a worsening housing crisis.
Do China’s woes go beyond the slowdowns caused by Covid-19?
It was the Chinese government’s response to the 2008 global financial crisis that sowed the seeds of China’s current problems. Bank credit jumped sharply around 2008 due to an implicit government guarantee. Property and real estate accounted for most of the credit. As a result, prices have risen. Economists have been predicting a crisis for years due to unsustainable bank lending. It is often seen as a crisis indicator when the credit to GDP ratio in China is so high.
The government avoided a banking crisis in 2011 and 2015 when prices fell sharply. This has turned into a crisis as the government is busy battling Covid-19 despite the recent price drop which was not as severe as in 2011 and 2015.
Why is the Chinese economy in crisis?
Besides China, the IMF lowered its growth projection for the world economy for 2022 from 3.6% to 3.2%. Chinese and Russian economic slowdowns are mainly to blame. A slowdown in China, according to the IMF, would have strong spillover effects around the world. During the pandemic, prices of consumer goods have risen around the world due to lower Chinese supply. Raw materials and intermediate goods supplied by other countries could also suffer from a drop in Chinese growth and demand.
Despite the decline in inflationary pressure, this could create problems for countries that depend on exports to China. Financial markets could also be affected by weaker global growth. Since China’s commercial sector is not as well integrated with the rest of the world as its financial markets, it may be able to cope with the situation.
Commercial channels will be the only channels of fallout. There will be a marginal impact on financial markets. In contrast, the highly interconnected financial markets of the United States led to spillovers into the financial channel during the 2008 financial crisis.
Why is the Indian economy affected by the Chinese crisis?
The Indian economy is both struggling and in a position to benefit from the Chinese crisis. China’s trade with India has grown significantly over the years, especially with imports.
In 2020-21, China accounted for 16.6% of India’s imports, compared to 10.7% in 2013-2014. During the same period, India’s exports to China increased from 6.4% to 7.24%. Chemicals, mineral fuels and other products are India’s main exports to China, while electrical machinery, electronics and other products are its main imports. Due to the Chinese economic crisis, India’s business sector may suffer. China imports energy and growth from India, but its exports are not as crucial as China’s.
Investing in imports from other countries could help India overcome this challenge. As a result, India will become less dependent on China over time. There is also scope for India to develop local manufacturing capabilities over time. Indian production centers may be positioned following the Chinese crisis. It will be a win-win opportunity for all global investments to bring into India.
What political benefits can India derive from this situation?
Besides repositioning itself as an Asian and global power, India can also use economic challenges as opportunities. Sri Lanka, Pakistan, Nepal and Bangladesh are among the South Asian countries facing crises.
China has not provided any financial assistance given its crisis, while most of them have relied on Chinese assistance. With the exception of Pakistan, India has helped all of these struggling economies, enabling the country to assert itself in the region. Since China has become increasingly autocratic in recent years, the global political community has been unhappy with its situation. As to whether India can finally achieve its long-awaited status this time around, world leaders have kept it on the sidelines all this time.
edited and proofread by nikita sharma