The Wake-Up Call From China

The market declined significantly in the face of the unexpected drop in the Chinese Purchasing Managers Index, following closely on the heels of China’s declining GDP growth and potentially serious credit problems.  According to HSBC, China faces a cash shortage in its financial system, creating a dilemma for the Chinese leadership that is focused on rebalancing the economy and reining in credit.  The market’s decline was on target, as the disappointments cast doubt on the widespread consensus of recovering global growth.  Without the impetus from the Chinese growth engine, the global economy cannot recover and is likely to fall into recession.  This is particularly true since U.S. economic growth has still not reached “escape velocity” at a time when the Fed seems set to wind down Quantitative Easing (QE) by year-end.

 HSBC China Manufacturing PMI

January data signalled a deterioration of operating 

conditions in China’s manufacturing sector for the first 

time in six months. The deterioration of the headline 

PMI largely reflected weaker expansions of both output 

and new business over the month. Firms also cut their 

staffing levels at the quickest pace since March 2009. 

On the price front, average production costs declined at 

a marked rate, while firms lowered their output charges 

for the second successive month. 

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