Context: Chinese economy grew by 6.9% in 2015, slowest in a quarter century. IMF expects the Chinese economy to slow down to 6.3% in 2016.

Q. Why is China slowing down?

1. It was only expected for no economy can continue to grow at 10% forever. China is still among one of the fastest growing economy.

2.  As incomes rise, most economies encounter what is called a middle income trap. To come out of it, china will have to innovate.

3. Slow down in exports as world demand has slowed down.

4. Rebalancing away from exports and investment towards domsetic consumption.

5. Ageing demography

6. Moving away from GDP growth rate obsession to sustainable development.

Q. If slowdown was expected, why is China devaluing its currency?

1. Chinese policymakers want China to still grow at a faster clip hence further devaluation to boost exports.

2. Chinese currency being pegged to US$ had appreciated with appreciation of US$.

Q. Is Chinese restructuring proving to be painful? How deep a trouble China is in? What about its debt level?

2 aspects of restructuring

1. From investment towards consumption

2. From manufacturing towards services

Percentage of GDP coming from consumption has increased. Also in 2015, services sector grew faster than manufacturing at 8% and now accounts for 50% of GDP.

Restructuring will certainly be painful. Worst aspect is nobody believes Chineses numbers and many analyst believes China is growing at 4% not 7%.

Debt Crisis – China invested huge amounts after 2008 financial crisis and its growth since than has been on a credit boom. Debt to GDP ratio increased many times in such a short span and there are no historic parallel of such a huge rise in debt in such a short span of time.

Good news is most of the debt is internally owned. Bad news is nobody knows the scale of debt and who owes to whom.

Q. why is their sudden capital flight from China?

1. 700b$ have been withdrawn from China in last 1 year and prime reason being policy uncertainty. Nobody knows what might be coming.

2. Stock market is volatile, bank returns are very low, real estate market is no longer suitable for investment (ghost cities you know), Chinese are parking their funds abroad.

3. Yuan devaluation will make it even more attractive to park funds outside as purchasing power of Yuan goes down.

Q. How does Chinese slowdown affect world economy?

1. With a major source of demand going down, world economy is heading towards recession.

2. It majorly affects commodity exporting countries of Africa and latin America. China was after all buying about 50% of incremental commodity output.

3. With China moving towards competitive devaluation, bad bad news for world economy.

Q. What about India? Rajan says not good for India while Jaitley says opportunity for India?

Jaitley’s / Pangariya’s view point

1. China slow down # commodity prices down # india major importer # good for India as forex outgo decreases plus input costs come down

2. Investment going towards China shift to India

3. We anyway don’t export much to China so our exports to china can’t go down any further.

4. We don’t compete with China in very many markets.

If we can put our house in order, put in place right policies, predictable tax structure and leverage competitive advantage of low cost labour, we can become global manufacturing hub and provide jobs to 1m people entering workforce every month.

Rajan’s view point-

1. In a globally connected world, Chinese slowdown can not be an unmitigated blessing.

2. Crude prices down but it affects economies of gulf whom we export, our exports down,

3. Expats will lose jobs there, remittances will come down plus social tension of rehabilitating them back.

4. South East Asian nations who export to China will slow, they will not buy from us.

5. Global currency war will be a disaster.

In a globally connected world, we can not grow because others are slowing, we will have to growing by improving our productivity. World demand will only help our growth story.