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India should and shouldn't worry about China’s 25-year-low growth

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Ananth Krishnan
Ananth KrishnanJan 19, 2016 | 14:08

India should and shouldn't worry about China’s 25-year-low growth

China’s economic growth has fallen to a 25-year-low according to economic data released in Beijing, on Tuesday.

On the face of it, 6.9 per cent growth is hardly reflective of a crisis (and a number that many economies in the West and Latin America would kill for). Yet the slowdown in China – fourth quarter growth was the slowest since the financial crisis of 2009 – has become an increasing cause for worry, particularly after recent troubles in the stock market and worryingly unpredictable currency fluctuations that, most analysts agree, suggest some degree of panic in Beijing.

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The slowdown is already being felt in India in more ways than one. Most obviously, the volatility in the Chinese stock market has been contagious, affecting global markets. The Chinese government has responded by pumping in billions to prop up the Shanghai stock market and putting in a range of curbs (and a short-lived "circuit breaker" to cap daily falls that ended up causing more panic than bringing in any sense of stability, and was subsequently shelved).

As much as the government tries to prop it up, the sense in Beijing and Shanghai is that the continued policy unpredictability of a government caught between short-term fears and long-term reforms may mean continued volatility.

One of the interesting takeaways from January 19 data is the growth in China’s services and retail sectors, which the government is banking on as it shifts away from an investment-driven growth model that has left as yet unsolved problems of overcapacity and debt in many sectors. Tertiary industries accounted for 55 per cent in 2015, the National Bureau of Statistics said, 2.4 percentage points higher than the previous year and 10 percentage points higher than the secondary industry. Consumption expenditure was up from 51 per cent of GDP in 2014 to 66.4 per cent last year, according to the NBS.

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Then there is the continuing collapse of China’s iron and steel industry, part of this process of economic readjustment, the repercussions of which are only beginning to be felt across northern China as mass layoffs and mine closures rattle a once booming industry. Tuesday’s data recorded a sharp fall in the growth of fixed asset investment, down from close to 16 per cent in 2014 to 10 per cent growth last year.

The rapidly declining price of steel and other commodities will, no doubt, hurt India’s steel and ore producers from falling prices as well as likely dumping from China, while others may cheer falling prices of commodities whose prices have been kept high from China’s hunger for resources which is now beginning to wane. China’s falling demand for ores has driven India’s trade deficit with its biggest trading partner to a record $45 billion in 2015.

Oliver Rui, a professor of finance at the China Europe International Business School (CEIBS), pointed out that one interesting consequence of China’s imbalance problem was that it is now looking to resolve the overcapacity issue by trying to transfer this capacity overseas (for instance, through its “Silk Road” initiative that envisages building connectivity infrastructure in Central Asia and the Indian Ocean, and by putting in $30 billion in the new Asian Infrastructure Investment Bank).

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Chinese companies are showing renewed interest (and some amount of desperation considering the troubles at home) in undertaking road and rail projects in India and other countries in the neighbourhood, which could help infrastructure-deficit countries (and worry others fearful of China dumping its excess capacity).

In the longer term, the slowdown will be both bad and good for India – depending on who you ask and which sector of the economy they’re looking at. Indian officials have recently expressed concern about the depreciating Yuan – a trend likely to continue – which will make India’s exports more expensive, but also expressed optimism that spluttering China could make India seem more attractive as a source for investment.

What's clear is that a bumpy road lies ahead for China, which means continued uncertainty for a region that has for long got used to Chinese growth.

But ultimately, whether or not China’s troubles will help or hurt India will depend on whether India gets its own story right, as one recent industry paper pithily summed up: “Each dollar that will come to India will come because of its own merit, and not due to weaknesses in China or elsewhere.”

Last updated: January 19, 2016 | 15:11
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