Why It’s Important to Watch the Changes in the Chinese Economy

The Chinese economy is showing traits that you should be watching. The country is experiencing an economic slowdown unlike any it has ever seen before.

The HSBC Purchasing Managers’ Index (PMI) for China has been contracting for two consecutive months. In June, the indicator, which provides an overview of manufacturing in the Chinese economy, registered at 48.2—down from 49.2 in May. (Any reading below 50 on the PMI suggests a contraction in the manufacturing sector.)

New business from the global economy to China declined, and companies in China have slashed their workforces.

The country’s new export orders in June fell at the fastest rate since March of 2009. (Source: Markit, July 1, 2013.)

In 2013, the Chinese economy is expected to grow at a pace slower than its historical growth rate. For example, Barclays PLC expects the gross domestic product (GDP) in the Chinese economy to grow at 7.4% this year. If this turns out to be the case, then this rate of GDP growth would be the slowest since 1990. (Source: Bloomberg, June 13, 2013.)

But that’s not all. Other banks, like Morgan Stanley (NYSE/MS), have also lowered their expectations of growth in the Chinese economy as well. Morgan Stanley now expects the GDP of China to grow 7.6% in 2013, down from its original forecast of 8.2%.

The Chinese economy was able to show some improvement after the global crisis in 2009. The country’s central bank reacted fast and flooded the financial system with liquidity. But the effects of all those efforts seem to be dissipating.

What many don’t realize is that the Chinese economy can actually be considered an indicator of growth for the global economy.

Not only is China the second-largest economic hub in the global economy, but China also exports a significant amount of its products to the global economy. If the country experiences a GDP decline, it’s because there isn’t demand in the global economy.

An economic slowdown in China can have many consequences throughout the world. One of them is a toll on the growth of smaller nations. Consider this: in the first four months of this year, China consumed 12% of all exports from Thailand. If the economic troubles in China continue, then countries like Thailand—countries that depend on exports to the Chinese economy—will see their own GDPs decline. (Source: The Nation, June 26, 2013.)

A similar principle applies to the U.S. economy as well. China is one of our trading partners. If demand in the Chinese economy declines, our exports will be hurt as well—and this will have an impact on our GDP, as U.S.-based companies that depend on exports to China will suffer due to a persisting economic slowdown. Keeping a close eye on the Chinese economy can keep you ahead of the curve when it comes to investing—even in American companies.

What He Said:

“Recipe for Catastrophe: To me, the accelerated rate at which American consumers are spending, coupled with the drastic decline in the amount of their savings is a recipe for a financial catastrophe.” Michael Lombardi in Profit Confidential, September 7, 2005. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else.