CHINA SLOWS DOWN – WHERE IS INDIA’S GROWTH IMPETUS?

The stock market seems to be so lackluster. It does not know which way to move as there is no real compass to follow now. Earnings are more stock specific but for the market as a whole, there aren’t any major triggers in the offing. The global moods will more or less dictate the moods as on the domestic front, we will now wait for August to come – RBI and progress of monsoon will set the trend.

For now, on the global front, the worrisome news of today was on China. Just as India reported a weak IIP for May on Friday, today morning, China reported a growth of 6.2% for Q2 of 2019, down from 6.4% in Q1 and lower than 6.2% (YoY). This indicates that China’s growth pace is slowest since 1992, the first time when China started publishing macro data.  

What is worrisome is that no stimulus seems to be working as of now. China had tried to kick start the economy by cutting 2 trillion yuan ($291 billion) in taxes and fees but that clearly does not seem to have worked.

The ongoing trade war with USA is clearly the overhang. Exports as such are down but now even domestic companies are holding back investments and spending. Sounds familiar? Despite attempts at negotiations, Chinese businesses are worried that the two nations can’t resolve their differences.  Now China has once again pinned hopes on getting more sops from the Govt. An Indian slowdown does not have a ripple effect but slower growth in China is affecting everything from smartphone sales to oil exports, and companies and countries in its orbit are beginning to feel the crunch.

This persistent slowdown in China and the ongoing trade war is changing the pecking order all over again. Many US companies, which are majorly invested in China, are slowly but surely shifting out and there is emerging a reordering of global manufacturing supply chains. The sentiments are so morose that they are now getting prepared for an extended period of uneven trade relations. 

Makers of Cros shoes, Yeti Beer, Roomba vacuums and GoPro are the companies who have started producing goods in other countries to avoid US tariff. Apple is considering shifting its final assembly plant of some devices out of China. Lovesac, which made 75% of its furniture in China has trimmed it down to 60% and by end of 2020, will have no production in China.

Sadly, despite India having an aggressive “Make in India” campaign, looks like a toothless lion as not many of those pulling out of China are moving to India. The first known case is of Hickory, N.C., company making antennas for sale in the U.S. is now manufacturing in India instead of China. In fact other SE Asian countries, Vietnam, Taiwan and even Malaysia are the bigger gainers. Ideally, we should have been the biggest beneficiaries but that has not worked out. Yes, there is some added upside to exports but what has also gone up are goods made in China, routed through India and other countries without significant alterations to avoid tariffs.

Despite the tariff war hitting USA also equally hard, Americans seem to be supporting this as they feel eventually manufacturing will come back to USA, create more jobs and maybe thwart the rise of a totalitarian superpower to world dominance. So as the US goes to vote next year, this trade war will be long drawn and in this time, there will be come about a lasting change in the global supply chain.

But thinking that this war will cut China’s feet is myopic. China will move up the value chain and until US labor costs match those in China, jobs are not going to go back to America because nationalism will not feed the stomach.

This ongoing trade war teaches us a very important lesson – our economy cannot be dependent on exports – Make in India will put us in a risk like China. As we have said time and again on this space, we need to change this slogan to “Think in India.” We need to develop India as an R&D center and everything intellectual; because anyone can set up a factory and get people to work but only a select few can think. Also think tanks need lesser space than putting in monolithic factories for which we have no land.

Well, in short, globally, things continue to look dicey and unless we have triggers from within, the impetus to the indices to move is missing.