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Is China facing an economic meltdown?

Dr. P Pullarao

China is India’s biggest trading partner. Though we have a huge trade deficit, India gains enormously from trade with China.  India also gets political benefits since it reduces hostility with China. In the last 20 years, India has become  the  most important  economic partner of China in  South Asia.

 

This is despite the fact that China has close military and strategic ties with Pakistan. China always describes its ties with Pakistan as those of an “ all-weather friend “. In fact China has invested huge sums of money in Pakistan infra-structure and Pakistan hopes that China will continue to  do so. Pakistan feels very secure that its close ally China is a great economic super-power.

 

However in the last 15 days, the world witnessed with horror the stock market meltdown in China.  Within 15 days, nearly 3 trillion US dollars was lost in the stock market. There has been a flight of foreign capital from China since the last year.   All this is   happening because suddenly the economic fundamentals of the Chinese economy have become suspect.  The excess capacity which China built in every sector has led to stagnation  and  economic depression.

 

China produced more cement between 2011 -2013 than the USA produced in the entire 20th Century. This shows the scale of how much cement China used for projects. It now looks as if this over-investment has led to a   slow-down in the Chinese economy. The stock market   meltdown would have really become catastrophic had it not been for the highly un-orthodox intervention by the Chinese government, which bought stocks and indulged in other manipulations.

Impact of Chinese slowdown on India:

India imports   much more from China than it exports. But a slowdown in China would mean that the quantum of trade with China would be negatively affected. This will have some negative impact on Indian economy. But the recent stock market meltdown did not have as big an impact on India as was expected. While one cannot predict the future, the contagion effect of a Chinese economic slowdown or stagnation might not be as serious as was originally expected.

 

The flight of foreign   capital from China would mean that some of that foreign capital might come to India. Foreign MNCs will also try to relocate some of their plants to India to hedge their bets on China. Already, the manufacturing giant Foxxconn is setting up many plants in India.  So a slowdown in China might be a mixed impact on India.

 

The slowdown in the Chinese economy also means that China might not invest huge amounts in Pakistan and other countries.  There will be a slowdown in China giving away money to various countries.  Pakistan would feel very severely the economic slowdown in China. Its all-weather friend will be less rich and less generous.

 

The slowdown of the Chinese economy might also mean that commodities will become lower priced. This is good for India since India imports most of its oil and metals.  To what extent a Chinese economic slowdown will harm India is difficult to predict. The contagion effect of the Chinese   economic slowdown cannot be predicted. It also depends on how the European economies are doing and what is happening in the USA.

 

The Indian economy is not dependent on one country.  If the European economies are doing modestly well and the US economy also continues to pick up, then a Chinese slowdown will not be that harmful. But if all major economies suffer slowdowns, then definitely India will be negatively affected.

 

However from a strategic point of view, a slowdown in the Chinese economy maybe good for India.   China will become a little more realistic in is territorial ambitions and might not want to pick fights with every neighbor.

 

One can however say that continued slowdown of the Chinese economy will harm India since we have enormous trade with China. It is better that a military rival is doing well economically than poorly.  There is a greater degree of predictability when countries do well. We need predictable relations with China.

 

 

Dr P Pulla Rao is a Socio-political and Economic analyst

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