China Stalls

Global slowdown worsens as China cools, Europe sinks

Declines in two gauges of China’s manufacturing sector were particularly worrying for investors looking to the world’s second biggest economy – the main engine of global growth in recent years – to pick up the slack created by Europe’s debt crisis and the sluggish U.S. economy.

China’s annual economic growth is expected by analysts to fall to 7.9% in the second quarter, the first dip below 8% since 2009. That could pile pressure on authorities to attempt further stimulus.

”What’s really worrying is new orders have started to shrink and inventories have started to build up at an unusually fast pace,“ said Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong.

China’s official purchasing managers’ index – covering China’s biggest, mainly state-backed firms – fell more than expected to 50.4 in May, the weakest reading this year and down from April’s 13-month high, with output at its lowest since November 2011.

The separate HSBC China manufacturing PMI, tracking smaller private sector firms, retreated to 48.4 from 49.3 in April – its seventh straight month below the 50-mark – with the employment sub-index falling to 48.1, its lowest level since March 2009.

My view:

The China story is a redux of the health of global manufacturing.

That there are consistent signs of slowdown to the point of stalling should be of great concern to investors.

It is only a matter of time before this spills over into both the stock and bond markets.