It’s said that when the U.S. sneezes, much of the rest of the world gets a cold. The latest results of the Chinese manufacturing indicated there is some truth in that statement, with the purchasing manager’s index at 50.3 from 49 in November, according to the Beijing based logistics federation. The slowing growth of the world’s second largest economy is dangerous to the rest of the world though, as China’s sneezes hold an increasing amount of weight these days as well.
Last year, economists were anticipating emerging economies as the engines for global growth, but given the increasing intermingling between nations, the declines in the U.S. and Europe have robbed China of an audience and led to a slowdown that could darken the economic picture for the coming year.
A number of reports yesterday illuminated the impact that declining global growth is having on the formerly booming Asian markets. In China, an index of export orders displayed contractions for the third month running, leaving many to wonder if the numbers could lead to a global recession in 2012.
The recession in the U.S. have proven difficult to emerge from, with banks tights on loans and the U.S. housing on its way to reaching a bottom. Add to this the declines in Europe and the massive debts it will have to overcome, and its difficult to imagine that China’s growth could continue to flourish at its former rates.
At the same time that China is losing a significant amount of its customer base for its products, its own workers are demanding higher wages, making it more difficult for the nation to offer goods at the prices that attract buyers. During 2011, salaries surged 40 percent, to an admittedly still paltry $160 USD per month. While it will be a long time before labor rates are comparable to more developed nations, the risein the labor rate comes at an unfortunate time in the global economy. The combination oof Europe’s debt problems and the measure they’re taking, alongside the continued weakness of the U.S. could be potentially problematic for Chinese growth and the global economy at large. Demand for Chinese goods is anticipated to decline somewhat for the year.
On December 31, President Hu Jintao said that China is looking to achieve “relatively fast” growth in 2012 even against an increasingly unstable global backdrop. Achieving this will be difficult as both exports and increased scrutiny on property and bank loans could lead to a pause in the strength.
The results of this will slow the global economic growth rate and have a potentially negative impact on the U.S.. Presumably, emerging market ETFs with heavy investments in the Chinese economy will have difficulty recovering. During 2011, many investors sought out emerging market ETFs, like Vangaurd MSCI Emerging Market ETF (VWO) or S&P Emerging markets Infrastucture (EMIF) as protection against domestic inflation and languid growth. Now the potential for those ETFs to expand notably in 2012 appears to be declining. The same could be said for the many luxury brands that have been benefitting from Chinese exposure and the rising wealth levels there.