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Deceleration in Chinese Economic Expansion



  Aug 26, 2023

Slowdown in Chinese Growth


What are the current signs of economic slowdown in China?

Economic data shows a deflationary trend in China, with both retail sales and industrial production missing forecasts in July. Notably, retail sales grew at 2.5% y-o-y in July, down from 3.1% in June. Moreover, exports fell by 14.5%, imports dropped by 12.4%, and the overall unemployment rate reached 5.3% in July.
 

Why is there concern about China's economic performance?

The Chinese economy was expected to rebound after a prolonged zero-Covid policy, but the latest figures indicate deflationary pressures, raising concerns about its future growth trajectory.
 

What has been the impact on domestic demand?

Domestic demand is shrinking, evidenced by falling prices for goods, services, and apartments. The Consumer Price Index-based inflation dropped by 0.3% after being flat in June.
 

What are the causes behind this economic slowdown?

Factors include:
 
• Collapse of the debt-driven housing sector.
 
• Long-lasting strict lockdowns that stifled the domestic economy and disrupted global supply chains.
 
• Geopolitical tensions and consequent manufacturing relocations.
 
• Government crackdown on major tech sectors leading to significant revenue and job losses.
 
• Reduced spending from wary Chinese households and investors.
 

How have global markets reacted?

Following the release of China's economic data, major stock indices such as the S&P 500, Japan’s Nikkei, and the Nifty faced declines. China's central bank attempted to stabilize the economy by cutting its benchmark lending rate, though markets expected more aggressive stimulus. Currency markets also showed signs of stress, with the yuan depreciating against the US dollar.
 

Why should the global community be concerned about China's slowdown?

China plays a crucial role in the global economy, being both the world's largest manufacturing economy and a major consumer of key commodities. Any significant slowdown in China will affect global demand and disrupt markets. The IMF had predicted China would contribute 35% to global growth this year, but this seems unlikely now.
 

What is the "China Plus One" strategy and how is it relevant in this context?

The "China Plus One" strategy involves businesses diversifying their supply chains by including another country in addition to their operations in China. This strategy can be seen as a risk mitigation effort, especially considering the ongoing disruptions in China. With the current economic slowdown in China, countries like India might emerge as favorable alternatives for businesses looking to diversify their manufacturing and sourcing strategies.
 

What are the implications for India with China slowing down?

India aims to rival China in the global supply chain and manufacturing sectors. India's strategies, such as the Production Linked Incentive (PLI), could benefit if Chinese exports decrease. Additionally, if China exports commodities at reduced prices due to decreased demand, it could be advantageous for Indian manufacturers. However, if Chinese producers decrease the production of commodities due to reduced domestic demand, this could increase commodity prices globally. The FAQ captures key concerns, causes, and implications of China's current economic slowdown, providing a concise and clear understanding of the topic.


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