China is a wildcard in the equities markets. Continued evidence of slowing is driving down the country’s growth and threatening a hard landing, which would be disastrous for stocks.
The country is slowing due to the decreased demand from key trading partners in Europe, the U.S., and secondary markets in Asia and Latin America. China’s Purchasing Managers Index fell to 50.1 in July, the slowest reading in eight months.
Companies in China are feeling the crunch. Major industrial companies reported a 5.3% decline in profits in May, but rallied with a 1.7% decline in June, according to the National Bureau of Statistics.
JPMorgan Chase & Co. (NYSE/JPM) cut its estimate for China’s 2012 gross domestic product (GDP) to 7.7% from the previous 8.0%.
We are seeing a ratcheting down of interest rates and fully expect China will offer new stimulus to jump-start the economy. Perhaps we could see GDP growth continue to drop; after a 7.6% reading in the second quarter, there is some rumbling, suggesting things could worsen.
China recently announced additional spending on its railroad infrastructure, but the country needs to also focus on driving its domestic consumption, as I have recently commented. (Read “China Aims to Drive Domestic Consumption.”)
The country’s equities market is feeling the effects of the fear in the Chinese economy. The benchmark Shanghai Composite Index is down 4.0% this year, well below the comparative returns of U.S. indices. And unless there is a reversal, it would be the third straight down year for Chinese stocks.
The chart below shows a breakdown at just below 2,200 after failing to attract buying support and hold. The index is trading below its 50-day and 200-day moving averages (MAs) and showing a bearish death cross. My technical analysis showed a bearish double top formation in March and May, preceding the recent decline.
In an effort to entice investors, the China Securities Regulatory Commission (CSRC) cut stock trading transaction fees for the third time since April. Moreover, the regulator is also promoting the use of stock buybacks to help prop up the market.
I’m not convinced any of the above moves will help. The country is clearly in a bind and needs to deal with the underlying problems to fix the economy. Slashing fees simply will not cut it. Of course, the issue is out of the hands of the Chinese. The eurozone debt mess needs to be fixed, and growth in Europe will need to find some legs.
What is interesting is we are seeing more negative comments emerging from China.
“Downward pressure is still relatively big,” says China’s Premier Wen Jiabao, as he attributed the country’s economic woes (growth of 7.6% is still pretty darn good) to the stalled domestic growth and external factors impacting China.
The country’s GDP is estimated to ride up to 8.0% in the third quarter and 8.3% in the fourth quarter, according to the Bank of Communications.
If China can renew its GDP growth, this would add optimism to the global markets; albeit, I feel somewhat uneasy about whether the country can recover so soon.