The Chinese economy (
FXI
,
quote
) continues to struggle amidst the slowing global economy. Poor
macroeconomic trends continue to manifest, rendering a pullback
even more likely. Along with poor country-specific data, it looks
like the Chinese economy may get worse before it gets better.
[caption id="attachment_71968" align="alignright" width="300"
caption="It looks a little foreboding in Shanghai these days"]
[/caption]
As has been documented at Emerging Money, the Shanghai Composite
has struggled mightily this year,
underperforming almost every minor and major stock
exchange
. Stimulus rumors and a recent global rally in equities haven't
helped; the Chinese benchmark index closed on Friday at
a three-year low
.
Unfortunately, a reprieve for Chinese stocks does not appear to
be in the cards anytime soon. With the severity of the European
crisis escalating to a seasonal peak, a further decline in equities
appears to be
a likely outcome
. Considering the large exposure that Chinese companies have to the
European economy, it's unlikely that companies in the Middle
Kingdom will be spared.
Further, China-specific macroeconomic data continues to paint a
gloomy picture of the Chinese economy. HSBC's flash Purchasing
Managers Index for the month of August
fell to a nine-month low
with a reading of 47.8. This is substantially lower than July's
49.3 mark. As well, the 47.8 reading is well below the 50 threshold
that indicates growth in the sector.
Evidently, the global slowdown is having a palpable effect on
the Chinese manufacturing sector and the economy as whole.
The potential silver lining in this deluge of poor trends and
bad news is that the likelihood of more Chinese stimulus has
increased substantially. With the Chinese economy struggling and an
important political transition on the horizon, it's imperative for
the CCP to maintain a high rate of growth in the near term.
In the short-term, a major stimulus announcement could bump
Chinese stocks temporarily higher. However, for the next few
months, the Chinese economy could lag until growth potentially
picks up later in the year. For long-term investors, a substantial
pull-back over the next few months could be a buying
opportunity.
