China: The Real Threat to the
World’s Economy

The media is all over the European debt crisis in the eurozone and appears to be pushing aside the evidence of dangerous stalling economic growth in China—the world’s largest manufacturing country. Europe is slowing and this is hampering the demand for Chinese manufacturing.The media is all over the European debt crisis in the eurozone and appears to be pushing aside the evidence of dangerous stalling economic growth in China—the world’s largest manufacturing country. Europe is slowing and this is hampering the demand for Chinese manufacturing.

In November,China’s purchasing managers’ index broke below the neutral 50 level to 49.0, the first sign of factory contraction in about three years. The country’s sub-index for new orders fell to 47.8 in November, while the sub-index for new export orders fell to 45.6 in November. This is an indication that the demand for Chinese-made goods is declining, according to theChinaFederation of Logistics and Purchasing.

As you all know, there have been warnings signs inChina, including high inflation, speculative real estate buying, slower demand, and slower gross domestic product (GDP) growth.

Any impact on the Chinese economy could send shockwaves around the world. The Chinese economy, which had been charging ahead on all cylinders, becoming the envy of the world, is showing some growth pains that could hamper the country’s rate of growth.

The dire growth situation in Europe is a major risk. Don’t get too excited about the eurozone debt news, as the region will face some difficult hurdles ahead over the next year or two—namely anemic growth. But another significant threat is that China’s economy is stalling as export demand for cheap Chinese goods declines due to the lower demand from Europe and the U.S. The Chinese economy is faced with idle manufacturing facilities and excess capacity. The country built an enormous landscape for manufacturing, but the demand is contracting.

A problem is that the global demand for cheaper-made Chinese goods has been on the decline. Part of the reason for this is that other industrialized countries are looking at driving domestic employment by protecting local manufacturing and this would negatively impact China. For this reason, the Chinese want to stimulate domestic demand for the country’s goods.

To try to avoid a hard landing and drive up the economy,China announced that it would cut its bank reserve requirements as of December 5 in an effort to provide easy money and drive the slightly stalling Chinese economic machine. This would be the first cut in three years, clearly suggesting concern on the part of the Chinese government.

China’s real GDP is estimated to expand 9.5% in 2012, according to the International Monetary Fund; but there are many question marks as to whether this is achievable given the stalling in Europe and other industrialized regions in Asia and Latin America. GDP growth in the Chinese economy could plummet to as low as 6.8% in 2012 should the growth situation in Europe and the U.S. falter, according to the Asian Development Bank.

Don’t push this aside, as this is a valid concern that is causing some stir amongst traders.Chinais not immune to slowing. My real concern is that a hard landing, if it should happen, could devastate the stock markets inChina, manufacturing, real estate, and the financial system.

The concerns towards China and governance issues in small Chinese stocks have lead to the drying up of Chinese IPOs listed in the U.S., which you can read about in Chinese Reverse Mergers Stocks Taking More Hits.

If you want a safer strategy for playing China, you can find out how by taking a look at How to Play China with Less Risk.