Fears of a slowdown in China, the world's second biggest economy, has unnerved investors across the world. Indian stock markets have also been impacted and metal stocks have fallen for three straight days till Wednesday.
According to World Bank data, China, which grew at an average of 10.33 per cent between 2002-12, clocked a GDP growth of 7.7 per cent in 2013. China's turbocharged growth all these years has been on account of its export-driven economy and the massive capital investment done by the government.
However, trade data published last week showed that China's exports suffered an unexpected 18 per cent year-on-year drop in February. Falling export could have been on account of lower production or decreasing competitiveness of Chinese products.
Falling exports have been accompanied by a sharp dip in consumer inflation in China, which fell to a 13-month low of 2 per cent in February. This shows that the slowdown in the economy is not due to a general price rise in the economy but due to a slower production growth.
China, which has pioneered low-cost production in the past, no more enjoys the low cost benefit now. Rising labour cost and appreciating currency has taken a toll on China's advantage of low cost producer. The Chinese yuan has appreciated by 35 per cent against dollar since July 2005. An appreciating currency adversely impacts export-oriented economies such as China and Japan as its products become costlier in dollar terms.
China has traditionally been the world's biggest consumer of raw materials by the virtue of being the biggest manufacturer of export-oriented goods. With fears of slowdown, there are concerns that import of raw materials to China will moderate, pressuring global commodity prices.
This does not augur well for countries like India, which are a major supplier of raw materials. China is the world's largest consumer of iron ore, as around 80-90 per cent of global export goes there. It's unsurprising that iron ore is India's single biggest export to resource-hungry China.
Global iron ore prices declined sharply over the past 2 months and are currently trading at a nine-month low amid slowdown concerns in China, domestic brokerage Kotak Securities says. Softening global prices of iron ore will hurt domestic steel companies on expected decline in steel prices, the brokerage adds.
Shares in Indian steel makers such as Tata Steel have fallen sharply over the last few days as have global markets such as Japan's Nikkei. China, the world's most populous state, is also one of the biggest consumers of finished goods. So, a slowdown in China will also hit consumption demand and further pressure global growth, which is still recovering from the recessionary shocks of 2008.
What is China doing?
China's government is aiming to shift the economy's reliance on the investment and exports that fuelled a double-digit pace of expansion for three decades to one that leans more on services and consumption, which it hopes will feed more sustainable long-term growth.
(With inputs from Reuters)
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