By Garima Agarwal
China, the roaring dragon of the East, and the poster child of the Asian growth story has never found itself in such a situation. China, once the fastest growing economy in the world, has been facing unanticipated economic turbulence recently. It has since then demonstrated caution in approaching its financial and growth parameters. The caution is also coupled with a new-found sense of open-mindedness that has suddenly struck the Chinese outbound investment.
China’s economic slowdown
Concerns over the fairytale growth story surfaced back in 2015. China devalued its currency, sending worrying signals to the already struggling world economy. Chinese exports tanked 8.3% right before devaluation. Currency devaluation is often viewed as a desperate measure adopted in the case of sinking exports. Thus, it set the world to panic. Nearly $1 trillion flowed out of the country.
The decision to peg Yuan against a basket of currencies such as pound and euro, both of which moved in an unexpected direction since Brexit, didn’t turn out in favor of the country.
China also started fixing Yuan rates daily, based on the previous day close. Thus, it allowed market mechanisms to shape the direction of its currency. This, again, led to an effective 2% devaluation in the currency. China hasn’t been able to get itself to its former glory. Its current GDP growth rests at exactly 6.7% from the last three-quarters, slowest in the last two and a half decades.
Missteps by the government
Though a staunch socialist, the Chinese government reacted to the slug in the economy by boosting the inflow of deployable capital i.e. releasing cash for investment, primarily through cheap debt. This led to a sudden surge in debt levels, and as a spillover, unprecedented inflation in the real estate market.
The current real estate bubble is claimed as the biggest in Chinese history. Added with debt-fueled public investments and exports, rightful concerns over sustainability and stability of China’s recent growth are surfacing.
In order to revive the economy, China has started investing heavily abroad. China’s investment policy had never demonstrated a clear strategy. The self-sustaining nation and owner of the world’s largest consumer market has roughly $4 trillion of foreign reserves. Until recently, it showed no inclination of looking beyond its national borders. The only developing economy to emerge as a major investor, China’s leadership now views outbound investment as a means to gather technology, consumer markets, and safe haven assets. Saturation of domestic demand, thereby excess supply, declining profitability, and a severe dearth of homegrown investment opportunities is also adding to the fuel.
The Indo-China connection
India and China are like two estranged brothers belonging to the same Asian family. There are obvious differences of scale, per capita income, technological adoption, investment capacity. Even then, comparisons are constantly drawn between the two. Both the countries have their mammoth consumer markets and an infamous rise of the middle class driven entrepreneurship and consumer spending.
- China has been able to build up a thriving domestic ecosystem, something that India has struggled with.
- China has been able to build up internet giants like Alibaba, Baidu, WeChat. India has at best, become a market for Amazon, Google, and WhatsApp respectively.
- India’s lack of sovereign systems, non-existent entry barriers, and zero collective thinking and action have been the major culprits in not being able to build up companies like Baidu.
- China has been relatively more closed than India when it comes to FDI and is recently relaxing the boundaries a bit.
- Even though India’s investment in China is virtually nonexistent, China is actively investing in or collaborating with Indian companies. India, on the other hand, is viewing this as a way to gain entry into the elusive Chinese market.
What the future holds
The astronomical growth of internet companies in China has come with a massive dry powder at their disposal. Some of these are being employed in the next door neighbor. China has been responsible for some of the biggest deals in the Indian venture landscape. It continues to be on the lookout.
This could be partly with the motive of developing an ever growing market for Chinese products. Or it could be for gaining competitive access to the Indian business environment.
Maybe India and China can be finally united over economic interests. Maybe India could help China grow faster than itself. China should, however, continue on its path of economic revival. Otherwise, the next wave of economic depression, like everything else, would be Made in China.
Garima Agarwal, is currently working on launching a healthcare venture. She has worked with Sequoia Capital and India Value Fund Advisors previously.
Featured Image Credit: The Washington Post