2nd July 2012
The National Bureau of Statistics and the China Federation of Logistics and Purchasing reported Sunday that the official purchasing-managers index (PMI) fell from 50.4 in May to 50.2 in the month of June. A PMI reading above 50 indicates an expansion in manufacturing activity, while a reading below that indicates contraction.
"There is no question that China is feeling the impact from Europe, especially in the manufacturing sector," David Carbon of DBS told the BBC.
But even as China's economy shows further signs of slowing down, economists do not see major stimulus measures equivalent to the massive 4-trillion yuan ($629.6 billion) stimulus package it passed in the mist of the global financial crisis in 2008.
Although a worsening of Europe's sovereign debt crisis could prompt a much more aggressive response from China policymakers, a huge stimulus package will not be necessary because indicators such as fixed-asset investment, housing sales, bank credit and exports have stabilized, suggesting that recent monetary policies such as the cuts in banks' reserve requirement ratios (RRR), are already having an impact, writes CNBC's Jean Chua.
"In our view, Chinese policymakers recognize that if the euro zone breaks apart, it would not be a short-term development. Therefore, cyclical overreaction would have only limited benefits," Barclays' economists Huang Yiping, Chang Jian and Yang Lingxiu wrote in a report.
Instead, it might be better for China to accept slow growth and continue to focus on rebalancing and restructuring its economic model towards consumer driven growth. "Even if it becomes necessary for the government to do more to support growth, we believe it might launch a large program to train migrant workers, instead of undertaking more infrastructure projects," according to Barclays.
Meanwhile, Francesca Freeman and Sarah Kent write in the Wall Street Journal that any indication that China's economy is beginning to slow more than expected could be a nasty thorn in the side of the commodities sector, which is already under pressure from concerns over the euro-zone debt crisis and the U.S. fiscal situation.
The price of oil has slumped around 20%, while the price of copper has fallen 8.5% since the start of May through June 29.
"The biggest risk to commodities now is China, since problems in Europe have more or less been priced into the markets. What's not priced in is a hard landing in China," said Daniel Briesemann, a commodities analyst at Commerzbank. "People have been nervous about China for some months now, but the European debt crisis has overshadowed it."
Freeman and Kent go on to say that the inability to rely on China is leaving commodities in a more precarious position than they have been for over a decade.
"The possibility that the commodities markets won't be able to fall back on Chinese demand means that a further worsening in conditions elsewhere in the world will now likely have a serious and detrimental price impact. Investors are bracing for the worst."
More on Mindful Money
To receive our free daily newsletter sign up here.