Depression growing cracks in the wall of China

- The Chinese government expects the economy to grow at a rate of five percent in 2023. But according to economists it will be much less

The People's Bank of China has been a major exception among major central banks in cutting interest rates. While most central banks are struggling to control inflation, China's central bank is taking measures to stem weak growth prospects and price falls. However, the Chinese government expects the economy to grow at a rate of around 5 percent in 2023. But economists believe it will be much lower than this. Some long-term projections suggest that growth will slow to 2 or 3 percent by the end of the decade. What is special is that between 2000 and 2019, China's economy has grown at an average rate of 9 percent annually and has played the largest role in global growth. This sharp decline could have far-reaching implications not just for China but for the global economy.

Currently analysts are not predicting further volatility. Broader consensus often increases risk. For example, there were very few who dismissed the possibility of the US housing market going into a recession that eventually led to the broader financial crisis of 2007-08. Today, China is facing the biggest pain due to real estate. Heavy investment in real estate has led to the problem of oversupply. According to estimates, real estate accounts for about one-fourth of the GDP. Due to declining demand and prices, developers are unable to meet their obligations. But the problem does not end here. Banks have extended large scale loans to real estate developers and buyers. Property-related loans account for about 43 percent of GDP in China. Local governments have also taken loans from banks and the downturn in the property market has affected their ability to repay the loans.

During previous recessions, the government responded by increasing investment in infrastructure, which helped sustain activity in businesses such as steel and cement. But this time China will not be able to do so on such a large scale for at least two reasons. First, China has already built a lot of infrastructure that is not being used. Second, government finances are also not that helpful. According to the International Monetary Fund, general government debt is likely to exceed 100 percent of GDP in the coming years. According to the Bank for International Settlements, the combined debt of all levels of governments and government-controlled companies was 300 percent of GDP in 2022. When growth is low, loan repayment becomes very difficult. In such a situation, the possibility of deflation or very low inflation will complicate the matter.

Apart from these purely financial issues, there is also the issue of workforce size which is likely to decrease rapidly in the coming years. A recent report by London-based Capital Economics shows that China's labor force peaked in 2017 but is likely to shrink by half a percent every year until 2030. Among other things this will also affect the production. China's geopolitical position will not help either.

Slower expansion means lower commodity demand, which will lower prices and help a net importing country like India. But commodity exporters around the world will suffer. Due to weak domestic demand and excess capacity of everything, China will try to promote cheap exports which will help reduce inflation in various parts of the world in the short term. However, the future may not be very favorable in the medium term as supply chains leaving China to other countries may not be a necessary option. Apart from this, China's capital absorption capacity will decline and global savings will seek alternative destinations. Not only that, Chinese families may send more savings abroad as a precaution.

Slow global growth will not bode well for India. If India fares well, it could benefit from lower commodity prices and attract more global savings. India is encouraging manufacturers willing to move out of China to set up base here. However, India's trade deficit with China could widen further due to potential growth differentials and other factors.