Emerging Trends in Chinese Economy – Implications for India

The December 18, 2008 grand celebration at Beijing of the 30th anniversary of introduction of China’s Reforms and Opening up policy in 1978, in a top national level meeting with a well-publicised keynote address by the Chinese Communist Party (CCP) supremo Hu Jintao, has been an event of high significance for the regime. It reflected the recognition of the leadership in the People’s Republic of China (PRC), rightly so, that without that initiative three decades ago, the country could not have risen as a global economic and political power. It is another point that the occasion was politically used by the CCP to prove its legitimacy before the public as a ruling party. This is being so, it cannot be denied that accomplishing an average annual growth of 9.6% in thirty years since 1978, has been a feat unprecedented among the developing nations. With 13% growth in 2007, as revised very recently by China, the country has overtaken Germany as the world’s third largest economy. Two factors, widely being perceived as contributors to China’s economic miracle, are the emergence of an export-led economy based on the global need for cheap Chinese goods as well as the rise of a new middle class in the society capable of contributing to GDP growth through consumption.

There are now strong indications that the Chinese economy is slowing down, mainly on impact from the global melt down. The Chinese add two more contributory factors – tightening measures through out the world and the impact from natural disasters within the country. The PRC Premier Wen Jiabao himself frankly admitted the ‘risk’ of a decline, acknowledging the fall in the country’s external demand and assessing that the required boost in domestic demand as a balance may not be ‘significant’ in a short period (Interview to CNN, 29 September 2008).

The following are being seen as key indicators of a slow down:

1. China’s exports, a crucial factor for its economy, fell for a second consecutive month in December 2008 (by 2.8% from the corresponding figure for 2007 to US$ 111.16 billion). The fall is as a result of the recession in US, Japan and Europe leading to deceleration of demand abroad for Chinese manufactured goods. It is considered as deepest in the PRC since 1999.

2. Imports into China also fell in December 2008 (by 21.3 % from the corresponding figure for 2007, to US$ 72.18 billion). When exports fall, imports also automatically decline, for the reason that China uses raw material imports for exports.

3. Foreign Direct Investment (FDI) into China dropped by 36.52% in November 2008, to US$ 5.3.billion, when compared to the corresponding figure for 2007.

4. China’s fiscal revenue fell by 3.1% in November 2008, in comparison to the corresponding figure for 2007.

5. Construction of homes, offices and factories in China fell by at least 16.6 % in October 2008 as compared to 32.5% increase in the corresponding period in 2007.

6. Car sales in China fell by 10.3% in November 2008, when compared the corresponding figure for 2007.

How is the slowdown going to impact on the Chinese economic growth in the coming years? Authoritative analysts in China and abroad, agree that the growth rate may come down at least for the next couple of years. For 2009, while Chinese official and non-official estimates show a rate around 9%, the World Bank puts the same as 7.5%, as lowest in 19 years and against the figure of 9.4% for 2008. The UNDP predicts China’s growth around 8.4% for 2009. Some other forecasts (like that of Royal Bank of Scotland) have been pessimistic, lowering the growth for 2009 to 5%.

China has already started reeling under the negative impact of the economic slow down. Industrial employment situation is worsening. Export-oriented factories are getting closed down leading to loss of jobs on the part of rural migrant workers. From Guangdong alone, 600,000 jobless migrant workers have reportedly returned to their rural bases in 2008 (China Daily, 9 January 2009). Facing crisis in particular are steel and construction segments. Chinese officials and State-controlled media are becoming bold enough to express their concerns on the likely social unrest due to rising unemployment fuelled by massive bankruptcies and production cuts (Zhang Ping, Chief of the National Development and Reforms commission, 27 November 2008 and Liao Wang journal, first week of January 2009). According to reports from China, the slow down is also affecting the job aspirations of a growing number of young university graduates.

In sum, cracks are appearing in China’s post-1978 middle class, which has so far been nurturing China’s economic progress. The slowdown could not have come to China at a more inopportune time. The PRC remains already grappled with a host of other serious issues like the rural-urban gap, regional disparity, inflation, falling rural incomes, corruption and land seizures. Moreover, the authorities are coming under compulsions to deal with the increasing demands for political liberalisation (e.g Charter 2008) as well as ethnic issues relating to minorities in Xinjiang and Tibet. There is a thaw now in relation between the mainland and Ma Yingjoiu’s Taiwan, but China faces a long road to fully address the reunification question.

Under the circumstances, how the PRC is going to address the economic slow down becomes a key question. Theoretically, the solution being offered by Chinese leaders sounds good – carrying out a ‘flexible and prudent macro- economic policy, an active fiscal policy and a moderately easy monetary policy’. Certain practical steps are being taken. Adjustments in trade policy have been made to help exporters (Cai Jing journal, 8 January 2009). The PRC has also announced a stimulus package to the tune of 4 trillion Yuan (US$ 586 billion) and interest rates have been cut. More may be in the pipeline. But economists in general know that such incentives can only temporarily mitigate the problem and in a long term, there is no other way to China except to wait for a better global climate for exports. Premier Wen indirectly showed awareness of this when he ruled out a ‘short period’ for boosting the domestic demand.

Sino-Indian economic and trade relations have gathered momentum in recent years. China has become India’s largest trading partner, whereas India occupies 10th position in the list of China’s trade partners. In 2007-08, their bilateral trade went up by 47% than in the previous year (reaching US$ 37.88 billion as compared to US$ 25.73 billion in 2006-07). This level is slated to grow to US$ 60 billion by 2010. India’s exports to China also went up by 30% in 2007-08 (reaching the figure of US$ 10.78 billion as against US$ 8.28 billion in 2006-07). China’s primary exports to India are coking coal and electronic goods, while iron ore remains the main Indian export to China. Sino-Indian discussions on concluding a mutually beneficial Regional Trading Arrangement (RTA) are in progress. The trade balance however is in favour of China, as the PRC exports more than it imports from India. In 2007, the Chinese trade surplus against India was to the tune of about US$ 4 billion. Efforts therefore are in progress to diversify the bilateral trade basket. MoUs have recently been signed between the two nations identifying more Indian exports to China like polyethylene, marine products, manganese, cotton etc.

The implications of the decline for China’s foreign trade are not difficult to see. For 2009, only 5% growth in the total value of exports and imports is being projected officially; this would be the first single digit increase in China. Many factories in the country are closing down, as their exports to recession-hit developed countries have come to a stop due to lack of demand in the latter for Chinese products. In turn, the manufacturing units in the PRC may like to reduce the quantity of imports from abroad of raw material mostly used for making export goods. It is estimated that raw material import into China from abroad may thus register a fall in the immediate term; In particular, Taiwan (36% of exports to China), South Korea (25% of exports to China) and Japan (19% of exports to China), all in China’s neighbourhood, might suffer on this account.

In the case of India, iron ore remains the main commodity export to China. In November 2008, the quantity of this export reached a record figure of 8.7 million tonne. However, China’s demand for Indian iron ore may have a significant fall in near future, as China’s steel and construction sectors, greatly affected by the decline, reduce their appetite for this raw material. (Other iron ore exporting countries to China may also suffer similarly). Also, on 16 January 2009, the PRC State Council has passed orders to curb steel production capacity and announced fresh regulations to regulate iron ore imports.

It appears that there could be a positive side to China’s decline from the point of view of India. Chinese reports say (Cai Jing, 8 January 2009) that to assist the suffering exporters, the PRC has now allowed shifting of their factories from the country to ‘nearby’ outside locations; the justification being given is that labour costs outside would be cheap, to be precise, only to the extent of 38% of costs in China. Among the locations listed by China are India, Pakistan, Vietnam and Cambodia. It has further been revealed that 400 textile companies have shifted their manufacturing bases to Cambodia so far and 100 to Bangladesh. If New Delhi agrees, there are chances of relocation of cost-hit Chinese plants to India.

(The writer, D.S.Rajan, is Director, Chennai Centre for China Studies, Chennai, and India.Email: dsrajan@gmail.com)