Chinese slowdown, first deficit in 7 years

Monday, 11 April 2011 08:14

China spends its way out of economic depression and this has led to a fiscal deficit of 111bn yuan last year, this is despite a near 20 % rise in tax revenues and a record surplus of 1.19 trillion yuan in the first six months of the year.

China announced a fiscal stimulus package of 4 trillion yuan in November to build new roads, railways, schools and hospitals. Government spending in December surged to 1.66 trillion yuan, more than triple the previous month's total and 31% higher compared to the same month last year. How will this affect Germany and Australia who are undoubtedly two of the largest non and commodity based trading partners.

Germany's strength in the Eurozone has been helped considerably by their exports to China in the manufacturing sector and this is something that can certainly change in the coming years as China looks to internal production to reduce dependence. Germany is the largest EU trading partner with China and in the global top 5 for exporters. Germany is also the world leader in mechanical engineering, holding about 20% of this global market. Core German exports include such engineering products as vehicles, machinery, chemical goods, electronics, shipbuilding and optics.

On the other hand Australia is in the top three exporters to China in the commodities sector and this has lead to a massive rise in the Australian dollar and also very strong internal growth.

Both these economies are very closely tied to the ongoing strength in the Chinese economy, yet the manufacturing figures showed a contraction for the sixth month in a row in January. The CLSA China Purchasing Managers Index rose to a seasonally adjusted 42.2 from 41.2 in December. A reading below 50 reflects a contraction.

The government is looking to increase subsidies, stockpile various commodities and loosen credit controls for banks to increase lending and increase tax revenues. All these factors indicate that the government is looking to reduce it imports and this could create serious ramifications for those economies that have ridden the wave over the last 5 years.