In the first three months of 2014, China’s factories have experienced a decrease in their output, with manufacturing activity across China dropping to its lowest level in the past eight months. This decline in manufacturing output has come on the back of Chinese economic reforms put in place in 2013, restricting companies’ easy access to cheap finance and cutting support for unprofitable companies.
This decline in manufacturing output is a threat to China’s economy and GDP growth targets of 7.5 percent per annum, as China’s economy relies on internal investments and exporting manufactured products. This decline in manufacturing output will be felt around the world by both countries who supply Chinese factories with the raw materials they need and countries who buy and import those cheap manufactured products being produced.
For New Zealand the effect of this slowdown might be felt by our consumers with less manufactured products from China, leading to price increases. New Zealand might also see a reduction in the amount of exports going to China, as Chinese consumers and companies experience a tightening of income. This could hit our exports of dairy products particularly hard as China is our single largest market for these exports.
The likelihood of these outcomes for New Zealand is currently low, as the Chinese Government has announced countermeasures. They will increase tax cuts for small businesses and increase public investment in social housing and railway construction, in an effort to boost GDP growth in China. It has also been reported that the central bank in Beijing is ready to loosen monetary policy if needed to help ensure the Chinese economy reaches the 7.5 percent GDP growth target set by the Chinese Government.
The increase in public investment in railway construction will be through a special fund to be setup that will issue up to 150 billion Yuan in bonds annually. While the increase in social housing investment will be through the China Development Bank, already China’s biggest policy lender, setting up a special agency through which it can issue home financing bonds.