Chinese slowdown jitters

The Indian stock market and rupee have been under pressure lately due to the slowdown of the Chinese economy. There has been similar turbulence in the bourses and currencies of other emerging economies. Investor pessimism has cast a pall on markets after Chi first devalued its currency early this month, announced a cut in interest rates, relaxed bank reserve requirements, made it mandatory for big investors to buy stock, froze initial public offerings and took other emergency measures. But with Chi’s growth and manufacturing output slowing and share prices plummeting since June, investors around the world are apprehensive that Beijing’s figures are not revealing the true picture. There are fears that Chi will not be able to maintain its 7 per cent growth rate for long. A weaker Chi will impact economic growth of developing countries, create political turmoil in several countries in Latin America and Middle East, with steep currency falls setting off inflation and depletion of foreign reserves. Chi, after all, is now the major engine driving the world economy, one of its biggest consumers of metals and coal and an important market for export of machinery and consumer goods.

Throughout the Asia-Pacific region, a range of countries are now highly dependent on Chi’s demand for their exports, thereby incurring large interl debts of their own. Experts have pointed out that Chi’s problems have been building up since 2008, when its businesses embarked on a borrowing and building drive, amassing very high levels of overcapacity and bad debts. Like Japan earlier, Chi has invested hugely in building infrastructure more than was actually needed, and on real estate projects that are now having no buyers. However, Chinese policymakers are said to be giving enough indications of focusing more on their domestic market — towards services, consumer spending and technological innovation. Such a shift from its hitherto export-oriented model is likely to slow down growth, but the country needs to keep its growth momentum intact to service its huge debt burden. As of now, the US and Euro zone seem less affected by the developments in Chi. So can India, also growing at 7-8 per cent, join Chi as an altertive engine to drive the world economy, as hoped by Fince minister Arun Jaitley? Prime Minister rendra Modi has also called for turning the present global crisis into an ‘opportunity for India’. However, RBI Governor Raghuram Rajan while asserting that the Chi slowdown will not impact India much, has also pointed out that the 2 trillion dollar Indian economy is one-fifth of the 10 trillion dollar Chinese economy, and so even if it keeps growing fast, its effect will be far smaller on the world for a long time to come.