China's reducing growth and its impact on the world. - Seeker's Thoughts

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Friday, 25 January 2019

China's reducing growth and its impact on the world.


China grew for almost three decades at faster pace, but in the year 2018 China’s growth was slowest in 28 years. Reduction in growth of China will impact on the globe, as well as countries like India.


China has huge debt, and due to reduced production risk of bad loans also increases. China has debts three times of the size of the GDP of the country. Slowdown of Chinese economy will impact the market in several ways.


How to understand the slowdown in economy? - The indication of the slowdown

There are multiple factors which are turning weaker in Chinese economy that starts from observing exports, imports, manufacturing, capacity utilization of firms etc.

Falling Exports

Chinese exports have fallen 4.4 percent in a year that clearly indicates that demand of Chinese products has reduced. There can be different factors responsible for reduction in export.


Import also reduced

 Imports also observed the drop, falling 7.6%, and this is  the biggest decline since July 2016.

Reduction in Manufacturing

China’s manufacturing market has shrunk, and this started happening from the end of 2017. The trend of reduction continued in entire 2018. Even after heavy discount the demand was created in the market. Due to this the capacity of firm utilization also reduced. They were not able to produce 100 percent production according to their capacities. 

Firms also could not use the credit due to less demand of the product and that reduced the flow of the credit in the market as well.

The Government Support did matter

Majority of private companies did not have proper access to credit, and in the downturn those companies did not receive the support of the government to sustain the pressure. As a result, companies defaulted.
According to Moody’s Investors Service, bulk of the companies that defaulted in the four years through Dec 2018 weren’t state-backed.


This will impact on China
Industries are reducing output due to less demand for the product, and that reduces profit of industries. When industries do not get profits, they reduce employment opportunities and even some employees lose their jobs in higher numbers. Companies do not invest in new products and neither fresh investments are made when the demand for the product reduces.

Therefore, it can be expected that- lesser investments, job losses and lesser consumption will hit it internally.

How will it impact on the world?

China’s has been going through a stage where the demand for iPhones and automobiles has reduced. One of the biggest population resides in the country. The reduction in consumption of these products will hit companies around the globe and will slow down their production too..

Some factories in Guangdong — China’s export hub — have shut earlier than usual ahead of the long Lunar New Year holiday as the tariff war with the United States hit orders. Others are suspending production lines and cutting back on workers’ hours.

Half of all the world’s steel, copper, coal and cement go to China. So if it isn’t buying, prices are likely to fall. Its economy is now so large it pretty much determines the global price of a huge range of products.

Chinese industry is closely integrated into international supply chains.

At the turn of the century, China accounted for about 7%of global economic activity. This year the figure is likely to be 19%.


China is trying to copeThe easy money policy

China has reduced taxes, and reduced import duties to create demand. Even, the Chinese central bank has cut the amount that banks need to set aside as reserves five times over the past year, and guided borrowing costs lower. 
China has even fast tracked construction projects. In the period of less demand- the government has to leave money in the market more, that is why the government has been trying to free more funds for lending, particularly to more vulnerable smaller firms.

The fear is that more forceful easing could pressure the Yuan and aggravate high debt levels, with money going into less efficient or speculative investments.

More fiscal stimulus measures may be announced during the annual parliament meeting in March, including bigger tax cuts and more spending on infrastructure projects.
 What does Chinese slowdown mean for India? 

China has the biggest share in India’s imports, at more than 16%. It is also the fourth largest export market for the country, with a 4.39% share. So the impact on India is unlikely to be huge.

If yuan weakens, it makes imports from China cheaper; excess capacities in China could lead to dumping of products. This could hurt Indian companies. India’s exports of raw material to China could suffer.

On the positive side, India could become a destination for Chinese companies; it would make economic sense for Chinese companies to shift manufacturing of products they sell in India. India could gain from Chinese help in infrastructure.