Deepening economic woes in China, including declining trade, deflation, slowing growth, and an imploding real estate sector, is threatening to take a toll on economies worldwide, especially in Asia.
The country’s annual gross domestic product (GDP) growth last year slipped to around 3%. In July, the decline in Chinese exports widened to 14.5% after falling by 7.1% and 12.1% in May and June, respectively. The Consumer Price Index (CPI) slipped into the negative zone in July for the first time in two years, China’s National Bureau of Statistics data showed. While consumer inflation fell by 0.3% in July, producer inflation declined 4.4% during the month.
In contrast to the deflation situation in China, most European countries and the US are battling inflationary pressures amid the ongoing Russia-Ukraine war that is continuing to disrupt supply chains, especially food, and sending energy costs soaring.
Over the weekend, at their annual Jackson Hole summit in the US, central bankers stressed on the need to keep interest rates high till inflation is tamed.
“It is the Fed’s job to bring inflation down to our 2% goal, and we will do so. We have tightened policy significantly over the past year. Although inflation has moved down from its peak – a welcome development – it remains too high. We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective,” US Federal Reserve chairman Jerome Powell said at the summit.
Inflationary pressures have gripped India, too, where retail inflation soared to the highest in 15 months in July on skyrocketing prices of vegetables and cereals amid the prevailing global uncertainty and domestic disruptions.
China’s economic woes, however, will not affect India, said analysts.
“It is still not clear because this is an emerging situation. We have to wait 3-4 months to understand the impact of deflation on the global economy,” Srikanth Kondapalli, dean of the School of International Studies and a professor of China Studies at the Jawaharlal Nehru University in New Delhi, said.
China’s current economic trajectory seems to be emulating Japan, which went through a similar phase that came to be called as the ‘Lost Decade’ in the 1990s, Kondapalli said.
In the 1990s, Japan went through a prolonged period of economic stagnation that included low growth, deflation, and high levels of bad loans.
“A slowdown in China will lead to an overall slower growth for the global economy, and its impact on different economies and businesses will be mixed,” researchers Justinas Liuima and Lan Ha wrote this month in an article, titled China’s slowdown and deflation risks: Why it matters for the global economy, in market research platform Euromonitor International.
“China is one of the largest consumers of machinery, hi-tech goods, as well as luxury goods. Slower growth in China will negatively affect commodity exporters, especially Latin American countries and Australia,” the article said.
But Kondapalli said deflation in China is unlikely to impact India because of its limited exposure to the market.
“Developed markets are likely to be the most affected by China’s economic situation. India, however, is less vulnerable due to its minimal trade relations with China. In fact, India’s trade with China constitutes only about 1.6% to 1.8% of China’s overall trade,” Kondapalli said.
Trade data released by the Chinese customs department show exports to India fell by 2.2% year-on-year in the first seven months of the year to $66.67 billion, while Indian exports to China dropped by 1.8% to $10.91 billion. In comparison, Chinese exports shrank by 5% to $1,944.902 billion in January-to-July, while its imports declined by 7% to $1,455.336 billion, preliminary trade data released by the Chinese government on 9 August showed.
Following the violent clash between Indian and Chinese troops in the Galwan Valley in May 2020 that claimed the lives of 20 Indian soldiers, New Delhi banned a number of Chinese apps and cut back on trade with its Himalayan neighbor.
Data show India currently imports about 4,600 items from China, out of which about 370 are high-value goods, which include nuclear reactors, power generation gear, consumer durables, and active pharmaceutical ingredients.
For China, meanwhile, challenges continue to mount. US President Joe Biden this month signed an executive order blocking new American investments in China’s high-tech sectors, in a move that indicates the resolve of developed countries to consider investment destinations other than China.
“Last year, the US had banned Chinese telecom equipment makers Huawei and ZTE. Though India did not explicitly ban Huawei and ZTE, it kept both companies out of 5G network rollout by not giving them trusted sources tag. If one joins the dots, this could be seen as an opportunity for Indian firms,” Kondapalli said.
“During Prime Minister Narendra Modi’s recent visit to Washington, tech firm Micron committed to investing $830 million in Gujarat. The decision comes after some of Micron’s employees faced arrests in China, where laws compel companies and individuals to reveal sensitive information,” Kondapalli said.
Due to the legal complications faced by some of its employees in China, Micron is considering India as a more secure destination for its next round of investments. While the investment amount of $830 million is relatively modest, the full benefits of this move will only become clear after a waiting period of about six months, he added.
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