In China, the economic news is going from bad to worse.
- The country's Purchasing Manager'sIndex (PMI), which in May
dropped to 49.2, signaling contraction, has slipped further in
the first three weeks of June, to 48.2. A key component of the
PMI, new export orders, fell to just 44.0.
- In May, imports fell to their lowest levels in roughly nine
months, due in large part to growing commodities
- Pricing power at key companies is dropping, thanks to
chronic industrial overcapacity.
- Weakercorporate profits are raising concerns for the
Chinese banking system, as many banks have issued a tremendous
amount ofloans to manufacturers andreal estate developers in
- The era ofeasy money in China appears to be winding down as
interest rates are quickly moving higher. (The seven-day
repurchase rate shot above 8% this week, after being below 4%
for much of the past few years.)Economists cite aliquidity
crunch as the cause for the higher rates, which may be a sign
that souring loans are stressing bank balance sheets.
Still, despite these emerging clouds, most economists haven't
pressed the alarm button. For instance, Asia-based HSBC Bank is
now forecasting the Chineseeconomy will grow 7.4% thisyear ,
roughly 1 percentage point lower than previous forecasts. But
it's fair to wonder whether that's too optimistic.
These next few months will be crucial in determining whether
China has a manageable slowdown, or an accelerating one.
A key sector to watch: Chinese retail spending, which has been
growing at a double-digit annual pace. For years, we've been
hearing of desires for Chinese domestic consumption to play a
greater role in a mostly export-driven economy, and we will now
see if such a transition can take place. Keep a close watch on
upcoming retailsales figures in China.
One thing is for sure: The Chinese government is no longer
inclined to pump up the economy with a big stimulus program, as
it has done in the past. The new government stance:Market forces
and key reforms will need to sustain the economy, and short-term
spending measures will no longer be pursued.
Painful Ripple Effects
The commodities markets have already signaled the growing
weakness in China. In the past three months, gold, tin and nickel
prices have all slid 12% to 15%, while copper, aluminum and
platinum are all off more than 5%.
Slumping demand in China has also hurt currencies andstock
prices in Australia, Brazil and South Africa. Even considering
China's role in their economies, however, I expect Australia and
Brazil will avoid a major meltdown, in part because of sufficient
Yet it is wise to grow more cautious about the "Asian Tigers,"
such as Indonesia, Malaysia, Thailand and Vietnam. Chinese trade
-- in both directions -- represents such a huge part of these
economies that a deeper slump in China would have a clear
negative impact in the region. I'm a huge fan of these tigers,
and if their markets slump badly in the next few months,
compelling long-term bargains are sure to emerge.
Here's a quick look at how key exchange-tradedfunds (
) in this region have fared recently. Notice that most have hit
their 52-week highs in just the past few weeks or months.
A QuickSell-Off , But Is More To Come?
Another Headache For Europe
U.S. companies are surely feeling the impact of a slowing China,
as we shipped $122 billion in goods and services to that country
in 2011 (which is the latest data available). Yet it's Europe
that will feel even deeper pain, as the continent sent $211
billion in goods and services to China in 2011.
These two trading partners may be locked in a vicious circle,
as weakness in Europe weighed on demand for Chinese goods, and
spreading weakness in China is now weighing down Europe. Still,
as Europe struggles to regain its footing, China's slowdown is
just one more headache.
Remarkably, Europeanstocks have fared reasonably well this
iShares S&P Europe 350 Index (
is not far from its four-year high of $45. Yet the China slowdown
may lead investors to reassess their bullishness.
Heading For U.S. Shores
What about American companies? Much of that answer depends on
what kind of retail sales activity we see in the next few months.
General Motors (
have been delivering decent results in China this year,
especially as Chinese consumers increasingly shun domestic
brands. Yet a slowdown in auto sales would probably be felt
In addition, consumer electronics firms like
Apple (Nasdaq: AAPL)
all count on the Chinese market for solid demand. Don't be
surprised to hear about emerging pockets of weakness in upcoming
As noted, the neighboring Asian Tigers are sodependent on
China for trade that they're also witnessing an economic
slowdown. Apple, Ford,
and others U.S. firms with sizable sales presences in Asia would
Can We Avoid The Contagion?
One of the most notable economic trends of the past fewquarters
is the increasingly stable U.S. economy, even as its trade
partners stumble. That may be a sign that the U.S.economic
recovery is becoming insulated and self-sustaining. Still,
considering U.S. exports of goods and services have from risen $1
trillion in 2003 to $2.2 trillion today, it's hard to see how a
spreading China contagion wouldn'twash up on U.S. shores.
Risks to Consider:
As anupside risk, China has had a few growth scares in the
past five years and managed to rebound fairly quickly. However,
those rebounds were aided by coordinated government stimulus,
which does not appear to be anoption this time around.
Action to Take -->
It's important not to be overly alarmed by China's incipient
economic weakness. It may only make a modest dent in our economy.
Still, with many investors now beginning to look past the impact
of the Federal Reserve's quantitative easing program, global
markets may again fixate on the still-troubled international
economy. Stay tuned to economic news in Asia and Europe as the
next few months will determine how the rest of the year -- and
perhaps 2014 -- plays out for investors.
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