What are the latest numbers on Chinese growth which are flashing red?
The general expectation was that the Chinese economy would rebound this year after three years of zero-Covid policy. But the latest economic data show that the world’s second largest economy has slipped into deflationary mode. Both retail sales and industrial production missed forecasts in July. According to the National Bureau of Statistics (NBS), retail sales in July grew 2.5 per cent year-on-year, compared to a 3.1 per cent in June, and value-added industrial output expanded by 3.7 per cent y-o-y, slowing from the 4.4 per cent growth witnessed in June.
China’s exports fell by 14.5 per cent in July compared with a year earlier, while imports dropped 12.4 per cent. And overall unemployment rate had risen to 5.3 per cent in July. Youth unemployment, a keenly watched indicator, hit a record 21.3 per cent in June. China’s debt is now estimated at 282 per cent of GDP, which is more that of the US.
But the most worrying aspect is shrinking domestic demand. The prices of apartments and a range of goods and services have fallen, with the Consumer Price Index-based inflation dropping by 0.3 per cent after flatlining in June.
What are the main causes behind this slowdown?
The Chinese economy is currently facing a crisis of confidence. A confluence of factors has led to this. The major one is the near collapse of the decades long debt-fuelled housing sector, which contributes to about 30 per cent of China’s GDP. The country’s protracted and stringent lockdown — shutting schools, offices, parks, etc — all but choked the domestic economy. It created global supply-chain upheavals as well. These, along with geopolitical tensions, triggered manufacturing relocations, weakening domestic growth and consumer spending further.
Meanwhile, the government began cracking down on its vibrant tech sector — video gaming, edtech, e-commerce — on the grounds that the tech companies were getting too big and powerful. This has resulted in huge losses of revenues and jobs, as many of these firms had to downsize or shut shop.
Amidst the declining and uncertain economic environment, Chinese investors and households are cutting back on spending, leading to a deflationary situation.
What has been the reaction of global markets to this news?
The grim data from China saw the S&P 500 fall 1.2 per cent on Tuesday. US Treasury Secretary, Janet Yellen, warned that China’s slowing economy was a ‘risk factor’ for the US economy. Apart from Chinese stocks, Japan’s Nikkei and the Nifty took a beating following the data release. China’s central bank has cut its benchmark lending rate to prop up the economy, but investors were hoping for big-bang stimulus measures.
There was upheaval in the currency market too with the yuan losing ground against the US dollar. The rupee slid to life-time low against the dollar as currency market panicked. Global bond yields have also been shooting higher, signalling heightened risk aversion.
Why are global markets worried about the slowdown?
The latest data suggests that China may struggle to achieve the growth target of around 5 per cent set for the year. A slowdown in China will affect global demand. Not only is China the world’s largest manufacturing economy, but it is also the largest consumer of key commodities. It accounts for almost half of the world’s metal consumption. The IMF had previously forecast that China would account for 35 per cent of global growth this year, but that’s looking far-fetched now.
Is a slowing China good or bad for India?
India is hoping to compete with China as a major player in the global supply chain and as a manufacturing hub. It has unveiled schemes like PLI (Production Linked Incentive) to boost domestic manufacturing. India’s China plus strategy can get a boost if Chinese exports taper down.
Commodity markets are very sensitive to Chinese demand. If China begins exporting base metals and other commodities at reduced prices, due to slowing demand, it could benefit our manufacturers. On the other hand, if Chinese producers begin cutting back on production of metals and other commodities due to slowing domestic demand, it will push commodity prices higher.