Amid all the focus on the US Federal Reserve’s plans to scale down its $85 billion-a-month bond-buying programme, the happenings in the world’s second largest economy – China – have somehow not received adequate attention here. This, despite the fact that the Fed’s tapering of its so-called quantitative easing policy is only a distant, even if likely, possibility. At the end of the day, the current recovery in the US is too fragile and its economy still has almost 2.5 million fewer jobs than it did before the start of recession in 2008. The Fed Chairman, Ben Bernanke, has made it clear that any monetary stimulus rollback is subject to unemployment rate stabilising below 7 per cent hopefully by mid-2014.

There is no such ambiguity when it comes to China. Policymakers there have consciously decided to rein in credit growth and crack down on the country’s shadow banking system, which has been responsible for much of the reckless lending in recent times. Last Thursday, banks paid a record 13 per cent-plus on short-term money borrowed from one another. The credit squeeze was attributed no less to China’s central bank refraining from infusing any liquidity – a clear communication of the authorities’ intent to slow the pace of credit creation in the economy. This marked a significant departure from Beijing’s stance in the post-2008 crisis period, when state-owned banks were pressured into lending aggressively that resulted in the total credit-GDP ratio rising from 125 to 200 per cent within five years. China’s new leadership seems quite determined to prevent the credit bubble – with all its attendant speculative consequences – from swelling further, even if at the cost of an economic slowdown. The underlying calculation appears to be that an economy still growing at 7-7.5 per cent can afford to slow down a bit, if it helps in averting a much more serious financial crisis down the line.

A sustained US recovery may, in the short run, induce the Fed to wind down its massive dollar-printing operations and thereby affect capital flows to emerging economies such as India. But its medium and long-term impact for the Indian economy will be unambiguously good, given that the US is the country’s largest export market. On the other hand, a prolonged Chinese slowdown – not to be ruled out, given the extent of over-investment and excess credit build-up since 2008 – may not be bad for India either. To start with, China sells more than three times what it buys from India. While Indian exports aren’t likely to suffer much from a Chinese slowdown, the impact on imports will, if anything, be benign. As China’s factories consume less crude oil, coal, copper, zinc and various other minerals, the resultant softening of commodity prices can only work to India’s advantage. A slowing Chinese economy could also increase India’s relative attractiveness to global investors.

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