China Economic Crisis: Collapse Inevitable?

By: Tavaga Research

If high inflation, rising interest rates, and recession fears weren’t enough for the world to worry about, the latest entrant into the pandora’s box is the Chinese economy. The Chinese banking system and the real estate crisis are so deep that depositors have started withdrawing their hard-earned money from banks and resorted to hoarding.

Known as the manufacturer for the world and the driver for global supply chains, the economic powerhouse as big as China is facing some real trouble amid continuing covid-19 lockdowns. The property market continues to bleed and the consumers have stayed away from pent-up spending unlike what’s currently being witnessed in many developed as well as developing nations including India. The micro, small, and medium enterprises are bewildered by the ongoing travel restrictions.

The downfall of the property market which is known to be the largest business sector in China along with a steady fall in demand by consumers signals a darkening economic outlook. The record high jobless rate has further deteriorated the situation. The commitment of Chinese health officials to Covid Zero has taken a toll on the nation’s consumer market.

Adding to the woes, the International Energy Agency (IEA) in its recent correspondence, mentioned the biggest annual drop in oil demand in the Chinese market in more than thirty years due to covid-19 lockdowns. The IEA had to further trim its annual global oil demand forecast due to the slowdown in China. 

The significance of the Chinese economy

China integrated itself with the world when it joined the WTO (World Trade Organization) in 2001. With global giants such as HP, Tesla, Hitachi, and Apple, making China their base for manufacturing end-products and ancillaries, the US global trading system has been successfully left behind by the Chinese market. China’s exports to the world have gone up by 4% to 15% in the last few years with the gigantic US market witnessing a slowdown and a decline in exports.

After becoming the world leader in manufacturing and generating millions of jobs for its people, China has improved its purchasing power parity as well. Along with the other manufacturing nations, China too faced the repercussions of a Covid-induced pandemic.     

As the world witnessed a tectonic shift towards digitization during Covid-19, there was a surge in demand for products best suited for virtual experiences. While China was to be seen at the forefront during revolutions previously, its absence this time has hurt its economy and human capital. 

What led to the adversities that China is facing today?

Apart from Covid-19, which has been the major cause of the downfall of the Chinese economy, the absence of checks and balances of financial institutions while lending has worsened their problems. 

After the 2008 global financial crisis, banks were given a leeway to extend credit with government guarantees which led to a spike in commercial and private real estate prices.

While the Chinese administration was successful in averting the tragedies caused due to a spike in real estate prices during the early phases of the previous decade, this time, it can become a herculean task for the government to interfere and prevent any kind of catastrophe as the country’s resources are majorly utilized for improving healthcare.

With manufacturing taking a major hit, a global spillover due to the meltdown can’t be ruled out. One direct effect of this could be a rise in prices of goods that was seen between 2020 and 2021. 

The financial markets are prone to shocks caused by the downfall of the Chinese economy. However, the disintegration of Chinese financial markets with the rest is indeed a sigh of relief. 

Any major financial event in Shanghai is expected to have only temporary effects on developing economies’ financial markets. This was seen during the Evergrande crisis as well. While China reacted sharply when the Evergrande group missed its deadline to repay the debt, the fallout was minimal in other financial markets. 

Thus, global trade and supply chains are more likely to get hit by worsening economic conditions in China, but the stock market performance of other nations will be highly dependent on domestic micro and macroeconomic outcomes.

India – The Clear Winner!!

While the Chinese real estate market had to confront a meltdown in its market, the Indian property market had one of its best periods ever during the first half of 2022. The housing sales of such quantum were last seen during the January to June 2013 period. The government’s renewed focus on affordable housing and a low-interest rate regime played a pivotal role in this.

India can become a key beneficiary in the following segments:

1. Electronic component manufacturing
2. API (Active Pharmaceutical Ingredients) Manufacturing
3. Auto and auto ancillaries manufacturing

With the recent China-Taiwan confrontation and the subsequent visit of speaker Pelosi to Taiwan showing unequivocal support to the latter, the Western economies have indicated their preference of shifting their sourcing base from China to other developing nations such as Vietnam and India. 

Additionally, with a weak Chinese oil demand leading to an overall fall in global demand and prices, India tends to benefit as the major chunk of India’s import costs is utilized by oil and oil-related products.

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