For the first time in seven months, China manufacturing is shrinking — and that has investors running for the exit in Asian stocks and other companies with Chinese exposure.
Take a look at the bloodletting in early trading:
- Japan’s Nikkei index lost over 7% last night, tripping circuit breakers to halt trading. The iShares MSCI Japan Index ETF (EWJ) is plunging 7% in kind on domestic markets.
- The iShares FTSE/Xinhua China 25 Index ETF (FXI) is down almost 3% in early trading.
- China megacaps including CNOOC Limited (CEO), China Mobile (CHL) and China Life Insurance (LFC) are edging down about 2%.
Markit Economics just released its May HSBC Flash PMI reading, or purchasing managers index, for China. And it wasn’t pretty, with a preliminary reading of 49.6 (anything less than 50 is a contraction). It was the first decline in manufacturing in seven months, and on the heels of a very rough 2012 for China manufacturing activity.
Here’s what the folks at Markit had to say:
“The cooling manufacturing activities in May reflected slower domestic demand and ongoing external headwinds. A sequential slowdown is likely in the middle of 2Q, casting downside risk to China’s fragile growth recovery.”
That’s big trouble. Just last week we saw a fresh round of downgrades to Chinese growth forecasts. A roundup in The Wall Street Journal has all the gory details, with the new median forecast down to 7.8% growth from 8% previously — a rate that would be the slowest since 7.6% GDP growth in 1999.
It all makes for an ugly scene for Chinese equities, Asia indices and the market in general. There isn’t a lot of growth to be had right now, and seeing a slowdown in China — especially as Europe remains mired in recession and America plods along sluggishly — is less than ideal.
There is a glimmer hope, however. Markit points out that “further signs of labour market slackness call for more policy support. Beijing still has fiscal ammunition to do so.”
But if the best thing about this is that economic conditions are bad enough to prompt central bank intervention … that’s some cold comfort.
- Japan took a beating last night … so the short yen/long Nikkei trade might be over. (Bloomberg)
- 3 sectors that will be hit hardest by the China slowdown. (MarketWatch)
- Check out all the details of the China flash PMI, including waning exports and backlogs, or PMI readings from elsewhere in the world. (Markit Economics)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.