China’s GDP Growth Slows and What it Means for India

The global markets were up against negative data flows on 18th October. For the third quarter ended Sep-21, China reported GDP growth of just 4.9%. That is a full 300 bps lower compared to 7.9% GDP growth reported in the Jun-21 quarter. The two major reasons for the fall in growth were stringent anti-COVID measures and a massive power shortage.

There were some positives like the retail sales of consumer goods in China inching up to 4.4% in Sep-21 as  compared to 2.5% in Aug-21. However, this is still well below the double-digit growth in consumer good sales till the month of June. In the midst of all these news flows, Evergrande is teetering on the brink of insolvency, with global ramifications.

Check - How China’s Evergrande Could Create a Major Crisis?

The real crisis that China is up against is the power crunch. To an extent, the situation is similar to India. Both, India and China depend heavily on thermal power generation to the extent of 70% of their power needs. That means, their ability to generate power is largely dependent on coal supplies. Two things changed in the last few months.

Firstly, China has been reducing its dependence on Australian coal due to its proximity to the US and their plans for creating a QUAD alternative. Secondly, the coal prices globally have gone up 4-fold in the last 5 months due to global shortage of coal caused by surge in power demand. As China recovers, this power crunch is proving to be the stumbling block.

The Chinese government has, meanwhile, come down heavily on a number of businesses in China including chemicals, pharmaceuticals, digital plays, education industry etc. All these have dampened sentiments and impacted growth.

For India, this has some key implications. Firstly, if the slow growth is combined with the Evergrande crisis, China could be up against a hard landing. That would mean a sharp fall in demand for metals, alloys and minerals. That would turn the tables against India’s robust commodity plays and impact India’s GDP growth as well as stock market valuations.

The other side of the story is what happens to the Yuan. With Evergrande and a likely hard landing, PBOC may be inclined to let the Yuan weaken. As we have seen in 2015, that can have a deep impact on the INR.