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Why You Should Care About Chinese Manufacturing

NEW YORK (The Street) -- Chinese manufacturing activity hit a seven-month low in February, rattling investor nerves on the outlook for the world's second largest economy.

Critically, the dependence of emerging economies on China means any slowdown there risks a ripple effect through global trade and financial markets.

Any investors who question its significance need only cast their eye to global equity performance early this year, when emerging market concerns shaved 5% off the S&P 500 in little over a month.

The Flash China Manufacturing PMI came in at 48.3 in February after a 49.2 result in January, with any result below 50 indicating contraction.

HSBC's chief economist of China & co-head of Asian Economic Research, Hongbin Qu, said the result showed momentum for manufacturing growth was weakening. "We believe Beijing policy makers should and can fine-tune policy to keep growth at a steady pace in the coming year," he told clients, echoing similar calls for government intervention.

Nomura's chief China economist Zhiwei Zhang agreed. "The recovery in China is not sustainable and GDP growth will slow to 7.1% in the second quarter.. considering China's 2014 GDP target of 7.5%, we expect the government to loosen monetary policy," he said.

More broadly, China has been described as the "lynchpin in the emerging universe" by analysts -- who warn the change in its growth model to a more consumer-driven society could have serious consequences.

"China is now facing deep structural issues and an unsustainable private debt trajectory as a result of its overinvestment in fixed assets," Societe Generale's head of global research Patrick Legland told clients.

While debate continues over whether China faces a so-called "hard" or gradual landing, most expect its economic growth to continue slowing to a more sustainable pace.

In the event China has a sharp growth slowdown, the impact has been described as "devastating" for commodity exporters such as Australia, Indonesia and Brazil.

All up, a weaker China also means less support for emerging economies that are struggling in the absence of rapid credit growth and strong capital inflows as global monetary policy is tightened.

Any investor attempting to play U.S. or global equities without considering China has been warned to re-cast their view.

 

-- By Jane Searle in New York

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