Prof D. Mukhopadhyay
The Chinese economy has been the epitome of remarkable growth and development over the past few decades. It has transformed from an agrarian society into the world’s second-largest economy, trailing only the United States. However, even juggernauts experience setbacks, and recent contractions in the Chinese economy have provided valuable lessons that emerging economies can learn. China is experiencing falling foreign investment and alarmingly rising unemployment among young employment seekers. This write-up delves into the factors behind China’s economic contractions, explores their implications that could prove invaluable for emerging economies including, India.
For more than three decades, China’s economy has sustained an astonishing annual growth rate, averaging around 10%. This unprecedented expansion propelled millions out of poverty, created a burgeoning middle class, and positioned China as a global manufacturing hub. Such remarkable growth was primarily driven by a combination of factors, including foreign direct investment (FDI), cheap labour, rapid urbanization, and export-led industrialization. The result was an economic transformation that awed the world.However, even the mightiest of economies are not immune to challenges, China has recently faced its fair share. One of the primary challenges has been the slowing down of economic growth. China’s GDP growth rate, which averaged double digits for decades, began to decelerate in the late 2010s, reaching its lowest point in nearly three decades. In 2020, the COVID-19 pandemic dealt a severe blow to China’s economy, causing its GDP to contract by 6.8%, marking the first contraction in more than four decades.Multiple interrelated factors, such as structural shifts, demographic transition, debt overhang, environmental issues, US sanctions particularly on semi-conductors contributed to China’s economic slowdown. China’s economic structure had heavily relied on exports and investments, but this model became unsustainable as global demand fluctuated and overcapacity issues emerged in various sectors. China’s rapidly aging population and shrinking workforce pose challenges to sustained economic growth, straining pension and healthcare systems.Its economic growth was partially fueled by credit expansion, which led to a buildup of corporate and government debt. This exposed the economy to financial vulnerabilities. Besides. the environmental toll of rapid industrialization became evident, forcing China to reevaluate its growth-at-any-cost approach and prioritize sustainability. It may be mentioned that during the mid-2000s, China concentrated substantially on construction industry to advance urbanization, though land in the urban sector is under state control, whereas rural China is under a kind of cooperative collectivism. The investment in the real estate sector was about 20% of GDP, according to Dr. Meg Rithmire, F. Warren McFarlan Associate Professor at Harvard Business School, Harvard University. Meg Rithmire, observed that during the late 1980s, Chinese government treated land as an instrument of socioeconomic development and land was meticulously allotted to factories, universities and large industrial organizations. It was used as the principal driver to capital formation. The urban municipalities were made the owners of the urban land and a centralized exchequer is in place . As a consequence, the municipalities had hardly any authority to levy and collect taxes and there was a huge gap between administrative and other operational expenditures committed on a regular basis by these establishments and the budget allocation from the exchequers. In essence, local governments were the party to any real estate and allied transactions . Eventually, property market faced a decline by 20% in 2022 , creating a bubble which was fomented by ‘Zero Covid Policy’. Let us have a glance at the current economic scenario of China. According to the National Bureau, of Statistics, profit of the industrial sector has declined by 6.7% in July, 2023 compared to the same period in the previous year. Earnings have persistently been shrunken by 15.5% during the last seven months and it is 16.8% during the first half of the fiscal year.The Big firms such as China Aluminium International has reported half-yearly loss to the tune of 830.60 million Yuan i.e. $114.2 million against the previous year’s net profit of 123.60 million Yuan.The performance of the major banks are showing a pessimistic target of about 5% lower as the post Covid recovery did not take off optimistically, slump in real estate, consumers’ demand, in conjunction with credit growth, made the money-market authorities reduce the interest rates to rejuvenate the demand. State owned enterprises , foreign firms and and private sector organizations have reported loss to the magnitude of 20.30%, 12.40% and 10.70% respectively for the first seven months. However, President Xi Jinping , while talking about the current status of the economy, said in a forum during his recent visit to South Africa that the Chinese economy is quite resilient and long term growth would not suffer due to strong fundamentals in place. Whatever, it is, Chinese economy seems to be contracting during the post-Covid recovery period and the researchers are of critical views.
China’s economic contractions holds valuable lessons, for the emerging economies such as Brazil, India, South Africa etc including, the adopted strategies such as diversification, sustainable development, debt management, and innovation.Diversification is troubleshooting approach. Relying excessively on a single growth driver, such as exports, can leave an economy vulnerable to external shocks. Emerging economies should diversify their sources of growth to ensure resilience in the face of changing global dynamics. China’s environmental challenges underscore the importance of integrating sustainable practices into economic strategies. The emerging economies should prioritize environmental stewardship to ensure long-term prosperity.The debt overhang experienced by China serves as a cautionary tale. Prudent fiscal and monetary policies to prevent excessive debt accumulation, which can impede economic recovery during downturns.Innovation and and technology absorption is of paramount importance.Emerging economies should invest in research and development, nurturing industries that can drive growth in an ever-changing landscape.Social Welfare planning is of no lesser importance. China’s demographic transition highlights the significance of robust social welfare systems.
China’s economic journey, marked by stunning growth and recent contractions, offers a wealth of insights for advanced economies too to ponder. The lessons drawn from China’s economic contractionis not just a reflection of challenges faced; it is a road-map for building resilient, adaptable, and sustainable economies. As the world continues to navigate uncertainty, the Chinese experience stands as a testament to the power of introspection and learning from both success and setback. As China seeks to address the challenges it faces and chart a path to sustained growth, there are several strategies that the country is pursuing which can serve as inspiration for other advanced and particularly emerging economies. Technology and Innovation received highest priority in China. It has recognized the importance of shifting from being the “world’s factory” to becoming a leader in technology and innovation. Initiatives like “Made in China 2025” and increased investment in research and development reflect this transition. The countries, including India, aspire to poise economic growth in a time-bound manner, prioritize latest technology absorption to drive economic growth and maintain global competitiveness.Consumer-Driven Economic policy may act as a efficient guide for these economies. China is working to re-balance its economy by boosting domestic consumption. Encouraging a robust middle class and enhancing consumer purchasing power can provide a stable foundation for growth.
China’s ambitious infrastructure and connectivity project, the Belt and Road Initiative, showcases its vision for connecting its economy with the global market which, essentially aims, to enhance volume of trade, commerce and investment across regions and continents. The ‘Green Growth’ strategy adopted by China shows the world that adhering to the Paris Agreement and investments in renewable energy to tackle climate change issues are included in the priority agenda. China is taking steps to address its debt overhang and strengthen its financial system. Implementing transparent and accountable financial reforms can provide stability and mitigate risks, serving as a model for other economies grappling with similar issues. Besides, China is assuming a more prominent role in global economic governance institutions, such as the Asian Infrastructure Investment Bank (AIIB) and the Shanghai Cooperation Organization (SCO).
The Chinese economy’s contractions are not a signal of decline, but rather a phase in its ongoing evolution. By critically analyzing both the achievements and setbacks of China’s economic trajectory, Emerging economies can learn to navigate their own challenges more effectively. As we stand at the crossroads of a rapidly changing global economy, the Chinese experience reminds us that growth is not linear, but rather a curve-linear shaped.India’s aspirations for economic growth and development bear many similarities to China’s journey.
As India strives to advance her economy and enhance the well-being of her citizens, there are valuable cautionary lessons that can be drawn from China’s recent economic contractions. By observing China’s challenges and responses, India can chart a more informed path forward and navigate potential pitfalls. Here are some ways in which India can be cautioned by the present Chinese economic debacle. Balancing Export-Dependence is of high importance. Much like China once was, India is a prominent player in the global manufacturing and service sectors. However, relying heavily on exports for economic growth can make India vulnerable to external shocks, as witnessed during the global economic downturn triggered by the COVID-19 pandemic. India should strive to diversify its economic drivers, focusing on bolstering domestic consumption and building a robust internal market besides strengthening her competitive position in the international market. Robust infrastructure development and debt management is the nucleus of economic activities. China’s infrastructure boom was a catalyst for its rapid economic expansion, but it also led to significant debt accumulation. India, as she invests in critical infrastructure projects, should exercise prudent debt management practices to avoid overburdening her financial system. A careful balance between growth-oriented investments and long-term fiscal sustainability is crucial for India.
China’s growth comes at a considerable environmental cost, resulting in pollution and resource depletion. India, as a rapidly developing nation, should proactively integrate sustainable practices into its growth strategy. By prioritizing clean energy, efficient resource utilization, and stringent environmental regulations, India can prevent some of the ecological challenges China faced. China’s demographic transition from a young workforce to an aging population has posed economic and social challenges. India, with a significant demographic dividend in the form of a young population, must focus on skill development, job creation, and harnessing this demographic advantage. Preparing for an eventual aging population will also require strategic planning for social welfare and healthcare systems. China’s economic contractions highlight the importance of innovation and technological advancement for sustained growth. India should invest in research and development, foster a culture of innovation, and support startups to drive economic diversification and competitiveness.China’s Belt and Road Initiative underscored the significance of strategic trade relationships. India can study the outcomes of such initiatives to ensure its participation in global economic networks aligns with its national interests. Crafting effective economic diplomacy can foster mutually beneficial collaborations while minimizing potential risks. China’s economic challenges revealed the importance of transparent and accountable financial systems. India can take cues from China’s experiences to strengthen its regulatory environment, ensuring that financial institutions are well-equipped to manage risks and support economic growth. India’s economic journey, like China’s, is marked by ambition, challenges, and opportunities. By studying China’s recent economic contractions, India can approach her own growth trajectory with greater foresight and resilience. The lessons learned from China’s experiences should be embraced as cautionary tales and road maps for informed decision-making by India and other emerging economies across the globe.
(The author is a Bangalore-based Educationist and Management Scientist).
