Abstract

This research paper delves into the Economic landscape of China, the world’s second-largest economy and leading exporter. The paper scrutinizes the complex factors contributing to China’s current economic challenges, despite anticipations of recovery following a stringent three-year zero-COVID policy. The research paper also depicts the profound implications of China’s economic slowdown and its potential repercussions on the global and Indian economies. It offers a comprehensive analysis of the strategic policy measures that India should prioritise to leverage the ongoing economic deceleration in China. The paper outlines India’s strategic initiatives, including the Production-Linked Incentive (PLI) programme and the “China plus one” strategy, positioning India as an attractive alternative for investors seeking stability and growth amidst China’s uncertainties. While acknowledging India’s ongoing internal challenges, the paper contends that India’s proactive measures can position it as a formidable player in the global manufacturing arena. The research offers valuable insights for policymakers, economists, and industry stakeholders, illuminating the transformative potential of India’s economic trajectory in the wake of China’s deceleration.

Introduction

The second-largest economy in the world and the world’s top exporter of goods, China, is on the verge of deflation. The nation’s GDP reached an all-time low of US$18.3 trillion in 2022, with 3% YoY growth (worst on record). While the government’s Zero-Covid policy (A policy which aims to eliminate all reported cases of COVID-19 within its borders through strict containment measures and widespread testing) boosted the economy, it was anticipated that the post-pandemic blues would pass swiftly. However, second-quarter growth in China was less than anticipated. In the April–June quarter of the current fiscal year 2023, China’s economy grew at an annual rate of 6.3%, which was less than the 7.3% predicted growth number according to a Reuter survey of economists. In comparison to the first quarter of 2023, the economy expanded 0.8% quarterly. S&P has decreased its earlier prediction of 5.5% GDP growth in China to 5.2% for 2023. China’s projection was the first to be downgraded by a major credit rating agency this year, but other agencies have done so, including Goldman Sachs. China’s post-Covid economic recovery has recently begun to wane as youth unemployment rose alarmingly to 21.3 percent in June 2023. The Consumer Price Index (CPI) and Producer Price Index (PPI) both experienced reductions in China, indicating that the country’s economy has been struggling with deflationary forces. The Consumer Price Index (CPI) experienced its first decline since February 2021 in July 2023, when it fell by 0.3 percent year over year. In addition, the PPI dropped for the ninth consecutive month, falling by 4.4 percent instead of the anticipated 4.1 percent. China’s anticipated growth rates for 2023 and 2024 are greater than the 3.0% growth the nation experienced in 2022. The economy’s pre-pandemic trend, which averaged 7.7% annually from 2010 to 2019, is much lower than the growth rate of roughly 5.0%.

Euromonitor International’s China Slowdown scenario captures the outcome of a worsening of China’s short-term growth outlook and long-term growth potential and its consequences for China and the global economy. A deeper decline in asset values and a recession in China’s real estate market might result in defaults, undermine trust in the financial system, trigger capital flight, currency depreciation, and an increase in unemployment. Meanwhile, China’s capacity for long-term growth would be compromised by a greater population drop and a slowdown in productivity growth. This scenario, the first and second years’ real GDP growth in China could be reduced by 0.3-1.2 percentage points in comparison to the baseline. Through trade and commodity links, a more pronounced downturn in China, coupled with weaker consumer spending and investment, will have detrimental spillover effects on the global economies. As such, in Euromonitor International’s China Slowdown scenario, global economic growth in 2023–2024 may be 0.1–0.5 percentage points lower than the baseline. A downturn in China will have a greater impact on developing economies, particularly those in nations with substantial trade exposure to China.

Background

According to credible assessments, China’s industrial growth has been almost 1.5 times greater than India’s over the past 50 years. India’s growth, though, has been significantly more steady. Although it was anticipated that economic reforms in the two nations would correct the heavy industrial bias of the plan era, China’s share of capital goods has gradually increased while India’s share has remained unchanged since the mid-1980s. The continued development of capital goods may have played a role in China’s competitiveness in the export of labor-intensive manufactured goods, among other things. Chinese reforms began with the agricultural sector. Although the land was still controlled by the government, the changes gave individual farmers a reason to produce more than required so they could sell it on the open market (Raj 1983). The reforms granted Chinese peasants rights to residual output, driving them to use their underutilized labor and land resources. This led to increased demand for non-agricultural products as rural incomes rose. China later shifted focus to infrastructure development in southern coastal cities, emphasizing labor-intensive manufacturing for exports. This change encouraged foreign direct investment, particularly from non-resident Chinese in Southeast Asia, particularly Hong Kong. This collaboration leveraged China’s abundant labor and Hong Kong’s market-based institutions, commercial organizations, and supply chain networks for success in the global market for light manufacturing. The Chinese reforms gave Hong Kong-based businesses a chance to maintain their competitiveness in the face of rising local labour costs and escalating competition from other Asian nations. Further, the promotion of a dual market system–perhaps similar to dual pricing in India in the 1970s and the 1980s–helped create markets for agricultural and industrial commodities based on price signals (Yingyi Qian 2002). A dark realisation for Indians is that the Chinese performance is not ‘out of this world’ (as it is sometimes portrayed in popular discourse), but rather understandable given its stronger agricultural and export growth. The difference in output growth rates between the two countries has not been reduced by India’s gradual reforms over the past 20 years.

Causes of China’s Economic Slowdown

After three years of a zero-covid policy, it was anticipated that the Chinese economy would recover this year. However, the most recent economic data indicate that the world’s second-largest economy has entered a deflationary phase. Let’s talk about the reasons for this economic meltdown in detail.

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