World economy is a complicated broth, China its toxic ingredient

  • Hindustan Times
  • Updated: Jan 21, 2016 01:03 IST
Asian markets resumed their downward spiral on January 20 with the previous day's China-fuelled rally effectively wiped out by ongoing worries about plunging oil prices and the state of the world economy. (AFP Photo)

That the wheels are coming off the Chinese steam engine has been amply proven by the latest growth figures which suggest that Asia’s biggest economy grew by the slowest rate in 25 years in 2015.

Making matters worse is a projection by the International Monetary Fund for a further slowing next year. This is bad news for the world economy for several reasons and a clear reason why markets are skittish in the extreme.

India may not be the worst sufferer of a Chinese meltdown, but you wouldn’t guess that by looking at the Sensex stock benchmark, which has fallen 8% since the beginning of the year, part of a contagion that has affected all emerging markets.

Why is China so critical? Simply because for the past decade it has been the driver of world growth, a large and dynamic economy growing at the rate normally associated with much smaller countries. It was the manufacturing shop floor of the world from where huge quantities of finished goods were shipped to all corners of the planet. This was accompanied, gratifyingly for resource-rich countries, by an almost insatiable appetite for copper, iron ore and oil.

Now that the economy is cooling off, offtake of these materials has fallen, leading to their prices hitting multi-year lows. To name only a few, this has hit countries like Australia (copper), Brazil (iron ore) and the Gulf oil producers: These were the countries that gained when China grew so fast so quickly.

A slowdown in consumer demand in China has also had its effects on the United States, Japan and Germany, major exporters to the Middle Kingdom. The Chinese government has showed itself to be unsure in handling a sharp fall in the country’s share markets, imposing restrictions on stock selling, a move that has rebounded.

A devaluation of the artificially controlled yuan to keep exports competitive has also spooked markets worldwide, which see it as a sign of panic and a portent of further reductions in the value of the currency and a round of competitive devaluations in the region.

For India, the impact of China’s slowdown has been on the rupee, which breached the 68-to-the-dollar mark on Wednesday, likely driven by heavy selling of Indian shares by foreign investors. A weak rupee will make imports costlier and is not having the usual tonic impact on exports because our key markets are slowing down. It will also make the Reserve Bank of India think long and hard about further interest rate cuts and could eat into our dollar reserves. All in all, the world economy is a complicated broth, with China the most toxic ingredient.

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