Is China’s Economic Juggernaut Losing Steam?

It’s well known that emerging markets have driven global growth for the last decade. In particular, China’s economic expansion, which began in earnest in the early 2000’s, has helped fuel a commodity and infrastructure boom in the world’s second-largest economy.

Even the crisis of 2008 was avoided by Chinese officials, who enacted massive stimulus programs to combat the loss of consumer demand around the globe.

The world economy has become dependent on China’s GDP growing between 8 percent and 10 percent per year. But recent data suggests that the Chinese economic juggernaut might finally be losing some steam.

China’s PMI Stumbles …

Over this past weekend, the Chinese manufacturing purchasing managers index (PMI) dropped to 47.6, well below the all important 50 level.

PMIs are some of the most important economic indicators around. And as a rule of thumb, there are two things to pay attention to:

First, is the index above or below 50? If it’s above, it means that sector of the economy is growing. If it’s below 50, it means that sector is contracting.

Second, is the direction of movement towards or away from 50? If the numbers are moving away from 50 (to the positive or negative side) it means the economy is growing at a faster rate each month, or contracting at a fast rate.

Unfortunately for the Chinese economy, this most recent data shows that the contraction in the manufacturing data is getting worse, as shown in the chart below.

The 47.6 reading for August is lower than July’s 49.3 reading.

To a degree, China’s troubles have been overshadowed by the European crisis, and somewhat dismissed because the market assumed Chinese officials would unleash a lot of stimulus to combat it.

But, that view is starting to change …

China’s Officials Haven’t Reacted
as the Market Anticipated

While China’s central bank, the People’s Bank of China, has implemented some stimulus measures, it hasn’t been enough to level the Chinese economy off at this point.

Whenever talking about the Chinese economy it’s important to think about perspective. You have to remember that China’s economy is still growing at around 7 percent per year, compared to less than 2 percent here in the U.S. But the markets are concerned that the pace of growth is slowing, and getting dangerously close to turning negative, meaning we could see Chinese GDP continue to shrink.

As mentioned, the European sovereign debt crisis is still dominating the market’s attention. But sooner or later that will change.

So keep an eye on China as the next potential market headwind for investors to notice. For the last 10-plus years, the global economy has depended on China to lead, but that appears to be changing. And it’s not clear if the global economy can grow again without China helping.

If you think China’s economy will continue to slow, one way to play it is through the ProShares Short FTSE/Xinhua China 25 ETF (YXI). This inverse ETF is meant to rise 1 percent for each 1 percent drop in China’s stock market. Just be careful, though, as it’s a very illiquid ETF, which could result in higher transactions costs.

Best,

Tom