EXPLAINED: The Reason Behind China’s Economic Crisis And Its Worldwide Impacts. How Can India Benefit?

Chinese Economic Crisis, Reasons And Impacts: The world economy was already worried about rising interest rates and high inflation when another concern came to the surface. There are fears about the economic collapse of the Chinese economy and its banking system.

Depositors are losing their sleep over the impending crisis, and thus are preparing to withdraw their money.

With China being a global growth engine, it is hard to believe that the country has landed in such a crisis. Before diving into the reasons, let us first consider the importance of the Chinese economy and how it contributes to the world.

The Chinese Economy And Its Importance

China joining the World Trade Organization in 2001 has led to its integration with the world. In the past few years, China has overtaken the US in becoming the center of the global trading system. Huge global giants like Tesla and Apple have their manufacturing basis in China.

Talking about China’s share in world exports, it has quadrupled from 4% to 15% last year. On the contrary, the US saw a decline in the percentage.

China overtakes the US in one more aspect. It has become a leading world economy in accordance with the purchasing-power-parity parameter.

However, while the Covid 19 was a great shock for the entire world, the Chinese economy too bore the brunt. Today, China is the center of the global supply chain of electronic products.

In the wake of the pandemic, the world shifted to digitalization, which led to a great increase in the demand for electronic products. Thus, lockdowns and supply disruptions did not allow China to cater to these demands, resulting in a huge scale shortage in its electronic goods supply.

Reasons Behind The Current Chinese Economy Meltdown

The Covid-19 outbreak saw a huge escalation in infections and thus the Chinese government imposed a rigorous lockdown in cities such as Shanghai and Beijing.

It is estimated that the stringent lockdowns may slow down the Chinese economy in 2022 and 2023. The International Monetary Fund (IMF) has lowered the Chinese GDP growth projection from 4.4% in the April-2022 outlook to 3.3% in the July-2002 outlook. It has also cut the country’s 2023 GDP growth projection from 5.1% to 4.6%.

Other Underlying Issues

The Covid-19 pandemic has only added to the already existing problems in the Chinese economy. The problems are rooted back in the 2008 global financial crisis.

During this time, the banks were given an implicit guarantee by the government to dole out credit. This resulted in a huge leap in back credit around the year. The credit’s bulk was directed towards property and real estate, leading to a spike in prices. Economists have been worried and warned several times that bank lending will lead to a crisis.

During 2011 and 2015, there was a sharp decline in the prices. In such a scenario, it seemed that the banking crisis became unavoidable, but the government averted it. 

Today, when China is busy fighting the repercussions of Covid-19, the economic crisis seems inevitable.

Chinese Economic Meltdown And The Rest Of The World

It would be wrong to say that only China’s 2022 growth projections have been lowered by the IMF.  The organization has cut 2022 growth projections for the world economy from 3.6% to 3.2%.

The key reason for this lower revision is cited in the Chinese and Russian downswing. Moreover, according to the IMF, a Chinese crisis will have robust global spillovers.

In case the supply of goods from China slows down, it may result in higher customer goods prices throughout the world, a scenario that the world has already witnessed during the Covid-19 days.

Moreover, if there is a decline in Chinese demand for supplies by the world, then, too, the countries that are dependent hugely on exports to China will suffer.

All in all, the lower growth in the world would adversely impact financial markets. However, the fact that Chinese financial markets aren’t very much integrated with the rest of the world, unlike its trade sector, proves to be a breath of relief. Hence, it can be said that the spillovers will affect the trade channels but the financial markets may not be that impacted.

Chinese Crisis And the Indian Economy

The Chinese crisis can act as both a boon and a bane for the Indian economy. The last few years have witnessed a rise in imports from China to India.

For instance, in 2020-21, the Chinese share in India’s imports increased to 16.6% from 10.7% in 2013-2014. During the same period, the share of India’s exports has also seen a rise to 7.2 percent from 6.4 percent.

India mainly exports mineral fuels and chemicals. On the other hand, India imports mainly electronic goods, electrical machinery, and more.

Needless to say, a meltdown in the Chinese economy will prove to be bad for India’s trade sector too. 

However, every challenge comes with an opportunity, and in this case, too, India can make use of the hidden opportunity. When the imports are likely to be affected, it won’t be a bad idea for India to seek imports from other countries.

This will help India to rely less on Chinese imports in the near future. Additionally, this is also a great opportunity for India to showcase itself as a global manufacturing hub. This will greatly boost Indian employment.

Political Opportunities For India

The Chinese economic meltdown is also a great chance for India to position itself as a political power in Asia and worldwide. Most South Asian economies including Sri Lanka, Nepal, and Bangladesh are facing the brunt of the crisis.

While these countries are still hoping for help from China, India can prove to be a great helping hand to these countries, thereby asserting itself in the region. This may help India get the status it has always been waiting for.