When China sneezes, the rest of the world catches a cold. You are not immune to the impact either. There are multiple ways the crisis in China affects your finances. Currently, the deadly virus has claimed over 2,000 lives, and over 75,000 people are affected. It is contained predominantly in a single province of Hubei. If the Chinese economy slows down drastically, and the spread of the virus continues, it could take months for the world economy to recover. “Global economic activity has also slowed down, and the prospects have weakened even further with the outbreak of coronavirus,” said RBI Governor Shaktikanta Das in his comments during the monetary policy committee meeting earlier in February. All other members of the committee, responsible for setting interest rates, concurred.
If economic activity around the world slows, your finances would also be affected. The slowdown influences economic factors such as interest rates, inflation and profits of businesses, which affect your investments too.China accounts for 16 per cent of world trade today. That is four times bigger than 4 per cent in 2003, when another epidemic hit the country due to Severe Acute Respiratory Syndrome, or the SARS virus. China is not just the supplier of goods but a significant consumer of products and services today, than 15-20 years ago. Many countries depend on exports to China for revenue. A lot of jobs depend on Chinese people buying consumer products. In fact, in the services sector, Chinese tourists bring in significant revenue to countries in Europe and East Asia.
In China, the government is lowering the cost of borrowing by bringing down interest rates and putting more money in the hands of the people. In faraway Singapore, the government has committed $1 billion to provide a fiscal stimulus that includes tax breaks and allowances for people to manage medical expenses arising out of any potential infection. Economies in close trade with China are acting quickly to ensure that people do not suffer hardships.
The Indian impact
India had a trade deficit of $159 billion as of 2019, according to CRISIL, a credit rating agency. That means India is an importer of goods and services to that value. A third of those imports are from China and Hong Kong. India depends on electronics, consumer durables, auto components, pharma bulk drugs intermediaries and chemicals, among other things.Most analysts believe that companies have inventories for a couple of months. As a result, the impact may not be felt immediately. As a consumer, you can brace for prices to rise in these segments if the outbreak is not controlled and factories remain shut in China.
More than revenue, Indian businesses depend on imports from China. Any supply shocks can induce inflation in the economy. The caution flagged by the RBI’s monetary policy committee is primarily due to that reason. If prices rise due to supply constraints, no amount of borrowing rate cut helps in stimulating growth. It adds to overall inflation and hurts net importing economies like India.
What should you do
Interest rates play a significant role in your finances. If you have most of your money in fixed income deposits, you may not see them going down further in 2020. The RBI committee that sets repo rates is unlikely to cut rates this year if the Chinese crisis prolongs. If you are a borrower or looking to take a new home loan or a car loan, you may want to bargain hard with your bank. They have a lot of headroom to cut rates for you as a borrower.
That means they borrow at low rates but lend money at a higher rate to make profits. The Reserve Bank of India wants banks to bring down borrowing rates without waiting for RBI to cut further rates. That is called monetary policy transmission. However, banks have been reluctant to do so. They keep a cushion for existing and potential non-performing loans. So, they offer low rates to borrowers with a good repayment track record and charge a higher to others.As an investor in the stock market, you may want to steer clear of stocks from sectors mentioned above that directly depend on the input supply from China. They may face rising costs and low profits if the spread of the virus, now called COVID-19, continues unabated. (The author is editor-in-chief at www.moneyminute.in)