If China slows down, where does that leave everyone else?
The steady fall in China’s manufacturing activity over the past few months is raising a giant red flag.
The HSBC purchasing manager’s index has now fallen below 50 points for five consecutive months, revealing a deepening contraction in mainland manufacturing.
New factory orders are at a four-month low and are expected to slow even further, HSBC’s chief economist says. Domestic demand is also expected to soften, but the bank is optimistic that production will improve later this year.
That optimism is not shared by everyone, however. At a conference in the central city of Chongqing this week we heard from a central government official that by the end of the year, China would begin to feel the full impact of the stagnant US economy and the worsening Europe crisis.
The official believed that domestic consumption would be nowhere near strong enough to offset the sharp drop in exports. Factories would continue to close down, their suppliers would go under and unemployment would surge.
Export-focused manufacturing is a specific business model built around the making of goods for overseas markets. Transforming themselves into domestic market suppliers may not be impossible for the factories, but it would take a complete overhaul of the business. Not to mention obtaining new licences, no easy task at the best of times, let alone when everyone else was also standing in the application queue.
China has been the anchor of the global economy since the global financial crisis. While the US and Europe staggered along, Asia remained largely untouched as Beijing poured money into its economy while tightening monetary policy to fend off a slowdown. While that strategy has created some chronic imbalances in the country, it kept growth in the high single digits.
But China lives in the same world as everyone else. Its GDP is expected to slip to seven-something percent this year and the economies of the other developing nations across Asia and in Africa and Latin America are also slowing. This developing block was the one bright growth point in a weak world economy, and if growth here slows down … well, we may as well pack up and do something else.
Like become a broker in red ink futures. I hear it’s a sure thing.