The Structural Challenges in China’s Economy
China’s decelerating growth in 2023 has raised concerns worldwide due to its deep interconnection with the global economy. Nations fear that this slowdown will have a negative impact on global growth. To address this issue, it is essential to determine whether the problem is cyclical or structural in nature.
Cyclical vs. Structural Crises
China has previously weathered crises such as the Asian financial crisis and the global financial crisis, as well as the US-China trade war since 2017. These experiences may suggest that such crises are cyclical and inherent in the Chinese economy. However, a closer examination reveals that the crisis in 2023 is different from previous ones and is actually structural.
China’s Economic Woes
China’s leaders referred to the current economic recovery as “torturous” during a Politburo meeting in July. The country faces various economic challenges, including slowing GDP growth, high unemployment rates, significant inequality, and low levels of consumption. These issues indicate a chronic shortage of demand and a potential risk of deflation.
Consumption as a Driver of Growth
China’s economic development relies on an export-led growth strategy and investment. However, China’s consumption rates have traditionally been low compared to other countries. Currently, consumption is further subdued, particularly in big-ticket items like cars, houses, and private investment. The Chinese government has introduced measures to boost domestic consumption, recognizing the need for change.
The Structural Reasons Behind Low Consumption
Various factors contribute to China’s low consumption rates, including high savings rates. Historical events, such as the Great Leap Forward and Cultural Revolution, have taught Chinese consumers to save for a rainy day. Similarly, recent challenges, like the COVID-19 pandemic, have reinforced the idea of saving rather than consuming. China’s increasing authoritarianism under Xi Jinping has also hindered the development model and exacerbated structural flaws.
Implications for India
China’s economic slowdown has implications for its neighbor, India, as they are intertwined in the global economy. However, reduced imports from China can also serve as a catalyst for India to actively build alternative supply chains. Collaboration with Taiwan has already begun in related industries, opening up opportunities for greater economic cooperation.
India’s top exports to China include refined copper, cotton yarn, and petroleum oils. While reduced demand from China may initially affect these segments, India can seek alternate markets for its products. Non-tariff barriers have hindered Indian products with comparative advantages in China, necessitating exploration of other markets.
Furthermore, falling prices of Chinese goods may increase competition, but Indian companies in China are relatively few. Slower economic growth in China can benefit India, particularly in the global energy and natural gas markets, by reducing competition and easing energy price pressures.
In summary, China’s structural economic challenges demand a thoughtful response from both China and its neighbors. This situation presents opportunities for India to reassess and strengthen its strategies in a changing economic landscape.