Rise of the Dragon: Why the world is afraid of China’s influence
China has come to a stage where anything that happens to its economy has global reactions. HT gives you some key indicators that explain why the country has such an influence on the world.business Updated: Apr 21, 2016 12:09 IST
China has come to a stage where anything that happens to its economy has global reactions. HT gives you some key indicators that explain why the country has such an influence on the world.
GDP: $10.3 trillion
The size of the China’s GDP in 2015. India: $2 trillion
China is the world’s third largest economy behind the US and the 28-member European Union. The country’s GDP has grown at an average rate of around 10% since 1991.
The problem, however, is that China is slowing down. In 2015, the country’s GDP grew at 6.9%, faster than every major economy except India, but slowest in 25 years.
China is one of the biggest importers of raw materials such as minerals, and also the biggest market for companies, including Apple .
A slowdown reduces consumption, hurting those dependent on China to sell their products.
Share of industry in China’s GDP. India: 30%
Manufacturing PMI – an indicator of growth in manufacturing activity – rose for the first time in March this year after falling for seven months. Despite the monthly increase, the index did not grow year-on-year.
The manufacturing powerhouse is currently reeling under excess capacity, primarily in the steel, coal and real estate sectors. The stagnation has meant China is importing less raw materials.
For example, China’s coal imports dipped 30% in 2015, according to Bloomberg. This would have hurt Australia, which accounts for 40% of China’s coal imports.
Imports: $1.6 trillion
China’s imports in 2015.India: $450 billion
China, which is the world’s second-largest importer after the US,saw a 7% drop in import volumes in 2015.
The top three products that China imports are crude oil, integrated circuits and iron ore — accounting for 30% of the total imports. China processes these goods into products such as petrol, electronic goods and steel.
Interestingly, unlike coal, imports of crude oil, integrated circuits and iron ore increased in 2015. This would generally counter the argument that the economy’s slowing down, but problem is that much of the goods are produced using these imports end up being exported.
Exports: $2.2 trillion
China’s exports in 2015.India: $310 billion
China is the world’s biggest exporter of electronic devices ($215 billion) and steel ($30 billion).
Big companies, including Apple and Microsoft, prefer to manufacture in China due to low costs.
The problem is not much with exports as with underpriced exports, which are termed dumped by importing countries. Dumping is claimed to damage domestic industries.
China exports its excess capacity because domestic consumption has been hit. The problem is exacerbated when China devalues its currency to make its low-priced exports even more attractive.
Exchange rate of yuan against $. India: Rs 66.65
Over the past year, the RMB — or yuan — has depreciated by over 6% against the US dollar.
Devaluation of the yuan makes China’s exports more attractive. These exports crowd out those from other countries, which can prompt them to devalue their currency, triggering “currency wars”. This is why a yuan devaluation causes global markets to tank.
Most countries do not devalue their currencies because it makes imports costlier. These countries, such as India, generally run a trade deficit. But with forex reserves of $3.2 trillion, China does not have to worry much about this.
Forex reserves: $3.2 trillion
China’s foreign exchange reserves. India: $366 billion
China has built this war chest by being a net exporter for the past two decades. Forex reserves help a country control its currency. China’s huge pile means that capital outflow – people taking their money out of the country – do not affect China much.
Forex reserves also come in handy to pay off debt. At present, China is sitting on a total debt of $28 trillion, which is half of the world total. Out of this close to a $1 trillion is off-shore debt – loans taken from overseas sources.
A slowdown in China puts this debt at risk. In case it defaults on even part of this debt, it will have a drastic impact globally.