The Chinese economy, the second-biggest economy in the world, is witnessing a significant decline in manufacturing. The HSBC China Manufacturing Purchasing Managers’ Index (PMI), compiled by financial information company Markit, fell to 47.7 in July from 48.2 in June. (Source: Markit, August 1, 2013.) Remember: any reading below 50 represents contraction in the manufacturing sector.
In July, the manufacturers in China reported a contraction in new orders—the sharpest drop in eleven months.
Manufacturing accounts for a very significant portion of the Chinese economy. According to the World Bank, it accounted for 30% of China’s gross domestic product (GDP) in 2011. (Source: World Bank web site, last accessed August 1, 2013.)
What’s happening with China’s manufacturing leads me to believe that the estimates of growth we have seen for the Chinese economy this year and next are just too optimistic.
The Chinese economy grew at an annual pace of 7.5% in the second quarter of this year. It wouldn’t surprise me if this growth rate declined further. And let’s not forget that this growth rate of 7.5% for the Chinese economy is notably lower than its historical average of 10%.
I keep pounding this on the table: U.S. stock markets will suffer as the Chinese economy contracts.
Here’s what the CEO of The Coca-Cola Company (NYSE/KO), Muhtar Kent, said on the company’s second-quarter earnings conference call: “As is well publicized, China’s economy has been slowing and this is now being felt in consumer spending. [Our] China first half retail sales were the slowest in 10 years… As a result, our volume performance in China remained soft and was even for the quarter, cycling 7% growth from the prior year.”
This is just one example of a large American company seeing softer demand because of the economic slowdown in the Chinese economy. It’s a major risk that shouldn’t go unnoticed.