Is the Chinese economy on the downturn?

Yes, the Chinese economy, after a brief revival from Covid, has been slowing lately. Official data showed the economy growing at just 0.4 per cent year-on-year in Q2 2022, after expanding by 4.9 per cent, 4 per cent, and 4.8 per cent, respectively, in the previous three quarters. Of the three key engines of GDP growth, gross capital formation — investments in assets — grew just 0.3 per cent and consumption shrank 0.8 per cent, while exports expanded 1 per cent. More recent data shows that, while exports have improved, retail sales and manufacturing are not in great shape. China’s industrial output in July expanded by just 3.8 per cent year-on-year, compared to 3.9 per cent the previous month and forecasts of 4.6 per cent. July retail sales grew 2.7 per cent, lower than the 3.1 per cent recorded in June and the forecast 5 per cent. IMF has lowered its GDP growth forecasts for China for 2022 to 3.3 per cent and for 2023 to 4.6 per cent.

When other economies seem to be recovering from Covid, why is China slowing down?

While most large economies, including China’s, have been hit by the Russia-Ukraine conflict, in China its government policies have also contributed to the slowdown. In 2020, the Chinese government brought in a three-red-lines policy that curbed fresh lending by banks to large real estate developers sitting on high debt. These new rules have led to debt defaults, a rising inventory of incomplete homes, and homebuyers striking on mortgage payments. The property sector is said to indirectly account for a fifth of the Chinese economy. Under its zero-tolerance policy towards Covid, China has locked down key industrial cities, thereby interrupting industrial growth. The property market crisis, and the stringent testing and quarantine rules have hurt consumer confidence, so there has been no revenge shopping or travel as in other countries recovering from Covid. China is an export-driven economy, so the supply chain disruptions due to the Russia-Ukraine war have added to its challenges. China experts say the government’s Zero-Covid policy and crackdown on overheated sectors such as real estate are an attempt to project the current leadership’s preference for balanced growth, rather than lopsided growth driven by monopoly businesses. The Communist Party of China is expected to decide on the future of the country’s leadership at its upcoming 20th Congress.

How has the Chinese central bank responded?

It has cut its repo and prime lending rates to stimulate credit and demand.

How will the China slowdown affect other nations and the global economy?

As the fastest growing large economy in recent years, China was expected to contribute significantly to global economic revival from the pandemic. It accounted for about a fifth of global trade before Covid. Therefore, the Chinese slowdown is expected to pull down global economic prospects. When the IMF projected China’s real GDP growth at 4.4 per cent in April 2022, it had forecast that the world economy will expand by 3.6 per cent. But in July, it has lowered its global growth forecast to 3.2 per cent for 2022. China is a key cog in the global supply chain, being a large supplier of critical chemical and industrial intermediates and consumer goods — from electrical equipment to plastics and toys — to the developed world. It is also a global manufacturing hub for consumer goods and electronics. A Chinese slowdown can impact global trade in all these products. On the flip side, China is also a significant consumer of commodities ranging from petroleum products to iron ore and copper. A slowing Chinese economy can thus cool global inflation.

How will this impact India?

India relies on China for a large number of pharma and chemical intermediate products, capital goods, automobile ancillaries and electronics components. A disruption in Chinese supplies can create shortages in these industries. However, lower Chinese consumption of industrial inputs and fuel can moderate imported global inflation, which has been pushing up WPI and CPI inflation rates in India.