NEW DELHI
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China’s gross domestic product (GDP) in the quarter ended 30 September 2024 grew at the slowest pace since the quarter ended 31 March 2023. The slowdown in the world’s second-largest economy is having knock-on effects around the globe, from the global oil market to Indian exports of spices. The Chinese government announced a stimulus package in September, but analysts expect it to take some time to have an effect. Instead, the worry is that after decades of blazing growth, the Chinese slowdown is more long-term than just cyclical in nature. If that is the case, the adjustment for the global economy could be painful.
Closer home, the effects are already being felt. Indian exports to China fell 23% year-on-year (y-o-y) in August to $1 billion. This monthly figure is the lowest since August 2022, when parts of China had just emerged from severe covid-19 lockdowns. India’s exports to China have now fallen for six consecutive months on a y-o-y basis.
The fall in exports is one reason for India’s merchandise trade deficit with China (exports minus imports) hitting new highs. It was about $41 billion for the five-month period from April to August 2024, an increase of about 14% from the year-ago period. India’s trade deficit with China in April-August accounted for around one-third of its total trade deficit.
Incidentally, imports from China rose to their highest monthly level in August, of $10.8 billion. Weak domestic demand in China means that Chinese exporters, already among the most competitive globally, will seek to make greater inroads into foreign markets.
Growth pangs
In the 11 quarters beginning 2022, China’s y-o-y GDP growth has been below 5% in eight quarters, including the last two. The current slowdown in China has been driven by the implosion of its real estate sector, a key driver of its growth for a long time. Further, mounting government debt has weakened infrastructure investments by local governments, another major factor in the Chinese growth process. Crucially, banks have become wary of lending more to both these sectors.
In the longer term, the big challenge for China is switching to a mode of growth that is driven less by investments, exports and real estate, and more by domestic household consumption. Another important policy aim has been to promote manufacturing investment in key emergent sectors such as electric vehicles and battery technology. The opinion is divided on whether China will pull off this ‘rebalancing’, even though it has been an official economic goal since at least 2004.
Export pullback
Amid China’s growth pangs, Indian exporters are feeling the pinch. For the five-month period from April to August 2024, Indian exports to China fell by $528 million compared to April-August 2023. Of the 634 sectors for which export data to China was available for both periods, 305 sectors declined in value terms.
The sectors that saw a decline in India’s exports to China included 8 of the 10 sectors where India’s exports to China exceeded $100 million in April-July 2023. Iron ore, India’s biggest export to China, declined from $1.15 billion to $882 million. Amid the collapse in Chinese real estate and construction, the exports of granite and other similar stone materials fell 25% on a y-o-y basis. The worst hit in this set of 10 sectors was cotton yarn, whose exports slumped 80%. The two sectors that managed to buck this trend were petroleum and vegetable oils.
Oil slick
India’s petroleum exports to China rose 14% in April-August to $577 million, second only to iron ore in value terms. Interestingly, this increase in petroleum product exports comes as the International Energy Agency (IEA) has flagged a global weakness in oil demand caused by the Chinese slowdown.
The IEA said: “China’s centrality to global oil demand growth this century has been so great that the precipitous slowdown in growth this year raises significant questions about the future global trajectory. If China’s long upsurge is really losing momentum, and with demand in advanced economies currently at the same level as in 2014 and set to decline, questions arise over whether other countries or regions could replace China as the engine of global oil demand growth.” This can impact the refining margins of Indian refiners like Reliance Industries and Indian Oil Corp.—just one of the many pockets in which a China slowdown will be felt.
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