China Sneezes, Will India Catch A Cold

"When America sneezes, the world catches a cold" has been widely used to explain the chain reaction from the world's largest economy's on economics, financial markets, politics, culture and policies of the rest of the world.

However, China, which overtook Japan in 2010 to become the world's second largest economy - has challenged the validity of the phrase. Any whiplash effect on Chinese economy has a spillover impact in the world.

Currently, China's economy have pointed to a gloomy outlook. Yet, weak growth, elevated youth unemployment, CPI and PPI inflation in negative territories, and struggling property developers are not necessarily new news. What deepens investors' worries the most is likely the absence of significant policy easing measures that affect the future growth trajectory.

Now, why should India or in that context the whole world be worried?

China is the world's largest exporter but it is also the world's second largest importer.

The value of Chinese imports has dropped for nine out of the last 10 months as demand falls from the record highs set during the pandemic, as per Bloomberg report. The value of shipments from Africa, Asia and North America were all lower in July compared with a year ago. Africa and Asia have been the hardest hit, with the value of imports down more than 14% in the first seven months this year.

With that, Chinese Yuan has fallen over 5% against the dollar this year, with the yuan close to breaching the 7.3 mark this month.

"We see the current slowdown in China being mostly driven by domestic cyclical forces, instead of structural trends or corporates de-risking from China exposure," said Helen Qiao, China & Asia Economist, Merrill Lynch (Hong Kong) in a BofA research note.

"While the ongoing service sector rebound will likely boost sequential growth higher, yoy growth should slide further, pushing policy makers to respond more actively in September-October."

What Will Happen To India If Chinese Economy Takes Larger Hit

No, at the moment, the implications for India are probably minor, given China's limited role as a customer for the country's various sectors.

If there is an investment downhill in the Chinese economy due to slowing rate and now deflation, India could possibly have a positive impact. For a long time, China has held its monopoly in the manufacturing sector, India could probably take a lead now and become the next manufacturing hub.

However, China imports about 70% of iron-ore from India. If imports fall due to slower economy, India could take a hit.

Finance Minister Nirmala Sitharaman on Friday said she would "rather play the India story" rather than talk about developments in China, which is battling an economic slowdown.

She made the remarks at the B20 Summit in the national capital while responding to a question on the impact of the slowdown in China on India and the rest of the world.