Even as the global economy adjusts to high inflation and rising interest rates, it faces another surprise. There are concerns about China’s economy and banking system collapsing. Depositors in China are rushing to banks to withdraw their money, indicating an impending crisis. How did the Chinese economy, which is regarded as a global growth engine, end up in this situation, and what effect does it have on the global economy? Moneycontrol elaborates.
What is China’s role in the global economy?
China’s economy has become increasingly integrated with the rest of the world since joining the World Trade Organization in 2001. Over time, the country has surpassed the United States as the center of the global trading system. Several major global corporations, including Apple and Tesla, have significant manufacturing operations in China. China’s share of global exports has quadrupled from 4% in 2001 to 15% in 2021. The US, on the other hand, saw its share fall from 12% to 8% during the same period. According to the purchasing-power-parity metric, China has surpassed the United States as the world’s leading economy.
During the Covid-19 pandemic, the impact of Chinese trade on the global economy was visible. China has evolved into the hub of the global electronic product supply chain. As the world economy aggressively adopted digitalization in the aftermath of the pandemic, demand for these electronic products skyrocketed. However, there has been a significant shortage of electronic goods supply from China as a result of lockdowns and supply disruptions.
What has caused China’s current crisis?
Following an increase in infections, the Chinese government implemented a zero Covid-19 policy and imposed strict lockdowns in major cities such as Beijing and Shanghai. As a result, China’s economy is expected to grow at a slower pace in 2022 and 2023. The International Monetary Fund (IMF) has reduced China’s 2022 GDP growth forecast from 4.4% in April 2022 to 3.3% in July 2022. The IMF has reduced China’s GDP growth forecast for 2023 from 5.1% to 4.6%. According to the report, “lockdowns and the worsening real estate crisis have caused growth to be revised down by 1.1 percentage points.”
Is there anything else to China’s woes besides the Covid-19-led slowdown?
The seeds of today’s problems in China were sown during the 2008 global financial crisis when the Chinese government provided large-scale stimulus to counteract the global slowdown. The government provided banks with an implicit guarantee to extend credit, resulting in a sharp increase in bank credit around 2008. The majority of credit was directed toward real estate and property, causing prices to rise. For a long time, economists have warned that bank lending is unsustainable and will lead to a crisis. The credit-to-GDP ratio, which is frequently used to predict a crisis, has been one of the highest in China.
There were times when prices fell sharply, as in 2011 and 2015, and a banking crisis appeared imminent but was averted by the government. Even though the recent price decline is not as severe as in 2011 and 2015, it has become a crisis as the government battles Covid-19.
What does the Chinese financial crisis mean for the global economy?
The IMF has reduced its 2022 growth forecasts for both China and the global economy from 3.6% to 3.2%. It attributed the lower revision to economic downturns in China and Russia. According to the IMF, a Chinese slowdown “would have strong global spillovers.” If supply from China falls, global consumer goods prices may rise, as seen during the pandemic. The slowing of Chinese growth and demand may result in less demand for commodities and intermediate goods produced by other countries. This may reduce inflationary pressures, but it will cause problems for economies that rely on exports to China. Globally, lower growth may have an impact on financial markets as well. The fact that China’s financial markets are not as well integrated with the rest of the world as its trade sector is a saving grace. As a result, spillovers will be limited to trade channels. The financial markets will be affected, but only slightly. In contrast, the United States’ highly interconnected financial markets resulted in financial channel spillovers during the 2008 crisis.
What does the Chinese economic crisis mean for India?
For the Indian economy, the Chinese crisis presents both challenges and opportunities. India’s trade with China, particularly imports, has increased dramatically over the years. The Chinese share of India’s imports was 10.7 percent in 2013-14, rising to 16.6 percent in 2020-21. During the same period, India’s share of Chinese exports increased from 6.4 percent to 7.2 percent. Chemicals, mineral fuels, and other products are major exports to China, while electrical machinery and electronic goods are major imports. The Chinese economic crisis may have an impact on India’s trade sector. While India’s exports are not as important to China, China’s imports are critical for energy and growth.
By seeking imports from other countries, India could turn this challenge into an opportunity. It will assist India in becoming less reliant on China over time. Over time, India could also develop the capability to manufacture these products locally. Indeed, the Chinese crisis presents an opportunity for India to position itself as a global manufacturing powerhouse. India has a large young population looking for work, and bringing global investment to India will be a win-win situation for everyone.
How can the situation benefit India politically?
Apart from transforming economic challenges into opportunities, India could reposition itself as an Asian and global political power. The majority of South Asian economies, including Sri Lanka, Pakistan, Nepal, and Bangladesh, are in crisis. The majority of them have been reliant on Chinese aid, while the Chinese have been unable to assist financially due to their crisis. Except for Pakistan, India has been providing aid to all of these troubled economies, which could help the country assert itself in the region. For some time now, the international community has been dissatisfied with the state of affairs in China, which has become increasingly autocratic. The global leadership has kept India on the sidelines all along, and it remains to be seen whether India will be granted its long-awaited status this time.