Slowdown in China

Posted on July 9, 2013 by David Laidlaw

Another long-term trend that is beginning to change involves the rate of economic growth in China. China’s output grew at a rate of 7.8% during 2012, which was its lowest growth since 1999. Growth slowed during the 1st quarter of this year to 7.7% from a rate of 7.9% in the 4th quarter of 2012 and this weakness looks poised to continue. HSBC’s Purchasing Managers Index fell from 49.2 in May to 48.2 in June. Readings below 50 indicate contraction in the manufacturing sector. The explanation for this contraction stems from slower Chinese exports to Europe and the US.

Short-term interest rates in China also spiked to over 20% a couple of weeks ago causing panic in the overnight lending market. Tightening credit and weaker global demand for exports suggests that China will no longer be in a position to drive world-wide growth.

This slower expansion could impact two separate markets. The first is the market for consumer goods in China. For instance, Nike reported revenue gains for sales of its athletic shoes and apparel in every geography except Western Europe and China. Secondly, prices for commodities will probably decrease as demand wanes in China, the largest global purchaser.