Is China facing an economic meltdown?

 Dr. P Pullarao

China is India’s biggest trading partner. Though we have a huge trade deficit, India gains enormously from trade with China.  India also gets political benefits since it reduces hostility with China. In the last 20 years, India has become  the  most important  economic partner of China in  South Asia.

This is despite the fact that China has close military and strategic ties with Pakistan. China always describes its ties with Pakistan as those of an “ all-weather friend “. In fact China has invested huge sums of money in Pakistan infra-structure and Pakistan hopes that China will continue to  do so. Pakistan feels very secure that its close ally China is a great economic super-power.

However in the last 15 days, the world witnessed with horror the stock market meltdown in China.  Within 15 days, nearly 3 trillion US dollars was lost in the stock market. There has been a flight of foreign capital from China since the last year.   All this is   happening because suddenly the economic fundamentals of the Chinese economy have become suspect.  The excess capacity which China built in every sector has led to stagnation  and  economic depression.

China produced more cement between 2011 -2013 than the USA produced in the entire 20th Century. This shows the scale of how much cement China used for projects. It now looks as if this over-investment has led to a   slow-down in the Chinese economy. The stock market   meltdown would have really become catastrophic had it not been for the highly un-orthodox intervention by the Chinese government, which bought stocks and indulged in other manipulations.

Impact of Chinese slowdown on India:

India imports   much more from China than it exports. But a slowdown in China would mean that the quantum of trade with China would be negatively affected. This will have some negative impact on Indian economy. But the recent stock market meltdown did not have as big an impact on India as was expected. While one cannot predict the future, the contagion effect of a Chinese economic slowdown or stagnation might not be as serious as was originally expected.

The flight of foreign   capital from China would mean that some of that foreign capital might come to India. Foreign MNCs will also try to relocate some of their plants to India to hedge their bets on China. Already, the manufacturing giant Foxxconn is setting up many plants in India.  So a slowdown in China might be a mixed impact on India.

The slowdown in the Chinese economy also means that China might not invest huge amounts in Pakistan and other countries.  There will be a slowdown in China giving away money to various countries.  Pakistan would feel very severely the economic slowdown in China. Its all-weather friend will be less rich and less generous.

The slowdown of the Chinese economy might also mean that commodities will become lower priced. This is good for India since India imports most of its oil and metals.  To what extent a Chinese economic slowdown will harm India is difficult to predict. The contagion effect of the Chinese   economic slowdown cannot be predicted. It also depends on how the European economies are doing and what is happening in the USA.

The Indian economy is not dependent on one country.  If the European economies are doing modestly well and the US economy also continues to pick up, then a Chinese slowdown will not be that harmful. But if all major economies suffer slowdowns, then definitely India will be negatively affected.

However from a strategic point of view, a slowdown in the Chinese economy maybe good for India.   China will become a little more realistic in is territorial ambitions and might not want to pick fights with every neighbor.

One can however say that continued slowdown of the Chinese economy will harm India since we have enormous trade with China. It is better that a military rival is doing well economically than poorly.  There is a greater degree of predictability when countries do well. We need predictable relations with China.

Dr P Pulla Rao is a Socio-political and Economic analyst

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Greek Financial crisis

Dr. P Pullarao

Greece is perhaps the oldest and greatest civilization of human. The Chinese and Indian civilizations and some South American civilizations have also been very old.  But Greece has been a continuous trend-setter of humanity. Greece is part of the 19 European nations union. They have a common visa and a common currency.  It is no longer a Greek crisis since the deadline has past.  Along with Portugal, France and Italy, Greece forms part of the Mediterranean nations.  They have no oil or major minerals and now all suffer from economic problems.  These countries are unable to avoid a large State benefits programs and a big state-employment sector and pension and socials services.  These 4 nations are now undergoing serious recession and   there is no visible light at the end of the tunnel.

In 2010, Greece fell into severe debt issues.  Greece took huge loans to meet its ever expanding needs. In 2010, Germany and other rich nations held imposed impossible conditions on Greece for repayment.  Greece agreed since it had a pro-Euro government. But the payments became impossible and now Greece is again in a critical economic condition.

While Greece is responsible for its financial mess, other European nations, the IMF and other multi-lateral funding agencies are also largely to blame. They readily gave loans decades ago to Greece thinking that a nation’s guarantees are safe. They did   not calculate that countries can also go bankrupt. Their terms for giving a bailout to Greece in 2010 were very harsh and doomed to fail. And hence such economic policies failed and Greece is back to a crisis.

In January, 2015, a left party the SYRIZA a won the Greek elections, stating that it will fight for change in economic terms imposed by the Euro-Union. The SYRIZA has been very firm.  While its strategy may boomerang eventually or fail, SYRIZA has been able to bring the world’s attention on the mischief done by the debtor-nations too. There is no doubt that there is a debate going on whether   the terms imposed on Greece in 2010 were right or morally correct.

The main problem for Greece is that the term imposed by the creditors makes it impossible for any economic growth. The terms imposed by the creditors seem to indicate that they do not want other debtor-nations in economic difficulties to follow Greece and fail. Greece has    “dare to fail “. If all other countries also took the Greek route and “ dared to fall “, then the entire  monetary system built up by Germany, the IMF and other such cash-surplus nations  will collapse. Therefore, the rich nations of Europe had vested interests in ensuring that Greece was made an example and harsh terms had to be imposed and had to serve as a warning to other debtor-nations, which were watching Greece and were tempted to flirt with failure.

The option to fail looks much easier for democratic countries in Europe than undertaking harsh reforms. Portugal is one nation which is not a large economy like France or Italy. Both France and Italy cannot afford to fail and other countries cannot afford to allow them to fail since they are too big.  Germany and the IMF particularly want to avoid further failures.  Many years ago, the same wealthy nations imposed very harsh terms on a failing small nation Cyprus and ensured that Cyprus implemented them. Now it is Greece’s turn.

Perhaps the world expected that at midnight on Tuesday the June 30, 2015, Greece will explode and disappear. Nothing like that happened. In retrospect, maybe the debtors of Greece like the IMF, Germany and other European countries wanted to frighten Greece to pay up. But their threats did not work.

Greece is one of the oldest countries and civilizations in the world. Alexander the great who conquered the known world 2000 years ago was a Greek. The greatest philosophers and intellectuals were Greeks. Aristotle, Socrates, Heraclitus and numerous others are still remembered for what they said or wrote 2000 years ago.

Ancient history tells s that Greece was about the same size it is today. Yet, it had vast influence and controlled the thinking of the world. Greece gave us the Olympics. Greece gave us the marathon.   Today Greece has only 11 million people and yet has 22 million tourists year. Greece is part of the European Union and its people have free access all over Europe.   Millions of Greeks have left Greece and are now settled across the remaining 18 countries of the European Union.

The Crisis

Like Portugal, Italy and France, Greece allowed high spending and huge budget t deficits.  This high spending by governments was way beyond the tax revenue.  Competitive politics made it necessary   for all political parties to expand populist policies and to promise everything the people wanted and then destroy the currency to meet it. Greece suffers from having a big elderly population, with huge pensions and very little tax contributions.   Greece suffers from the fact that millions of Greeks seek employment outside Greece.  Greece is also allegedly the worst country when it comes to pay taxes by its citizens. Greece has low tax compliance and high expenditures.

Oil-rich countries   can afford such low tax collections and big budgets as oil income takes care of everything. But Greece has no oil and very little mineral riches. This has created a situation whereby Greece kept borrowing all over the world. As on date, Greece as defaulted on an IMF loan. This is viewed as very serious in the financial world.

But there are other options. The Greek government seems agreeable to resigning and not clinging to office. This has made the task of the creditor nations very difficult. They will have to find a workable solution. There is a referendum in Greece on July 5, 2015.  The result of the referendum will also indicate how Greece and the creditor nations must proceed.

On visible outcome is there. You cannot impose harsh conditions on a nation and expect them to be implemented. Greece has perhaps helped all poorer countries   in that it had boldly opposed harsh conditions and “dared to fail “.

Dr P Pulla Rao is a Socio-political and Economic analyst