Why Chinese slowdown matters

The latest disappointing quarterly GDP growth numbers from China lend credence to fears of a slowdown in the world’s second largest economy. Growth slowed to 7.5 per cent in the June quarter, second quarter in a row.

Exports plunged 3.1 per cent in June from year ago, a shocker when seen against the double digit growth reported in earlier periods.

In fact, the fall in growth as indicated by the recent data has raised doubts about the genuineness of much higher rates of growth reported for the earlier periods.

Fear that the tapering Chinese growth is not a one time phenomenon but something that could have been happening for sometime now, is giving the jitters.

But why is the world so worried about a Chinese slow-down?

IMPACT ON COMMODITY MARKETS

The sheer size and growth – one of the fastest – have made China one of the largest consumers of metals, industrial raw materials and agri commodities globally. So any cooling in demand from China would exert a downward pressure on commodity prices.

It therefore follows that countries that are major exporters of commodities such as Australia, Brazil, South Africa and Chile stand to lose while others such as India that are dependent on commodity imports may benefit from lower prices. For instance, rising cost of crude oil imports — a major strain on India’s trade account — can be expected to come down

The impact is, however, likely to be felt the most in case of copper, steel, iron ore, coal and aluminium as China accounts for a major chunk of the word demand for these commodities in particular. Prices of copper, iron ore and coal have already been trending downwards in recent past.

Another way in which China could influence commodity prices is via the supply side.

For instance, an industrial slowdown in China, the world’s largest producer of steel, would lead to domestic steel oversupply in China.

As these find their way into the world market, they will exacerbate the already existing steel glut leading to further decline in prices.

Trade with India

We run a huge trade deficit (imports exceed exports) with China, one of our largest trading partners.

In 2012-13, China accounted for 4 per cent and 11 per cent of India’s exports and imports (in rupee terms) respectively.

With the Chinese economy hitting the speed breaker, imports (electrical machinery and equipment, mechanical appliances and so on ) are expected to get cheaper. India’s exports of cotton, copper and ores to China may ease somewhat.

maulik.tewari@thehindu.co.in

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