China's food pain to be New Zealand's gain

Last week, and somewhat against the world's expectations, it was announced that the Chinese Purchasing Managers' Index had fallen below 48, its lowest level for nine months and a level that might be considered as being consistent with a technical recession in China.  Moreover, our own weighted estimate of the true underlying industrial production growth has dropped to a 1% year-on-year rate, which implies that production year-to-date has been essentially flat in China's vast industrial sector.

Initially, financial markets responded to this latest run of weak Chinese data by rallying on the belief that the local authorities would now "have to ease" on the back of this weak economic performance.  With China, though, potentially having suffered a $60 billion balance of payments deficit in the second quarter as a result of sharply accelerating levels of domestic capital flight, there may now be a binding external sector constraint to domestic policy initiatives; China may not be able to ease without sacrificing its currency at a most inopportune moment in the global political calendar. Hence, the "big easing in China" may still be some way off, despite the weak output data.