Economy and Business

China's contagious economic turmoil

China’s transition to a ‘new normal’ rate of growth was always expected to be bumpy. But, as it shifts gears, the Asian giant is spilling pain on to the rest of the world, and volatility is about the only certainty in the global economy at the moment.

Jan 9, 2016
China’s transition to a ‘new normal’ rate of growth was always expected to be bumpy. But, as it shifts gears, the Asian giant is spilling pain on to the rest of the world, and volatility is about the only certainty in the global economy at the moment. The yuan’s depreciation on Thursday to its lowest level since 2011, again put stock markets and currencies worldwide under pressure. Investors fear other countries could now be forced to consider competitive currency devaluations. The depreciation was less unexpected than the devaluations in August and is in line with Beijing’s move to make the yuan — all set to become a reserve currency of the International Monetary Fund — more market-linked. There’s a fresh worry: China’s foreign exchange reserves shrank by $108 billion in December, the biggest monthly drop on record, and declined by $513 billion last year. To put this figure in perspective, India’s foreign exchange reserves added up to $350.4 billion on January 1. The accelerating outflows from China, investors fear, could also be a sign of the country’s deepening troubles. China is rebalancing its economy, shifting it away from a model of debt-fuelled infrastructure and low-cost exports towards lower but more sustainable growth, driven instead by domestic consumption and services. Reformers in Beijing want to slow the Chinese economy, which expanded at a frenetic 10 per cent annually before 2008, and by about 7 per cent more recently. As the world’s second largest economy goes through a recalibration, the question increasingly being asked is: are the authorities in Beijing in control of the transition?
 
The scale and span of China’s trade gives it an over-sized influence over the global economy. Its waning appetite for commodities and imports is hurting economies dependent on such exports. For India, though, the drop in international commodity prices, especially of oil, is providing a silver lining as it is a net importer. The pain for India will come from the big and growing trade deficit it has with China. The deficit, which was $48 billion at the end of March, had reached $36 billion in the first eight months of this year and could worsen with the yuan’s depreciation. The Indian government must recognise that the depreciating yuan is a threat above all to Prime Minister Narendra Modi’s ‘Make In India’ plan. Indian manufacturers already suffer significant cost disadvantages. Their competitiveness will now diminish further against imports from China. Under the burden of China’s slowdown, global trade itself has shrunk. Recovery continues to elude the world more than seven years after the financial meltdown in 2008 and the subsequent monetary easing worldwide. India must recognise that the global economic scenario is far from healthy and take steps to spur domestic growth.
 
The Hindu, January 9, 2016

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