Markets get spooked now that China is delivering exactly the slow down they wanted

07/01/2010 11:33 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Be careful what you wish for.

Financial markets have been hoping that China would manage to slow its economy--in order to keep inflation under control—without causing a crash in either the stock or real estate markets.

There’s mounting evidence that China is going to successfully engineer exactly the kind of “soft landing” that financial markets said they wanted.

But today, at least, stock markets don’t seem very happy that they’re getting what they wished for.

The manufacturing sector expanded less than forecast in June, according to a report today on a survey of purchasing managers by National Bureau of Statistics.  The purchasing managers’ index fell to 52.1 in June from 53.9 in May. (Anything over 50 says that the sector is expanding.) That’s the slowest rate of growth in 16 months (if you discount the whacky numbers created by the timing of the Lunar New Year holiday in February.)

Economists say this puts China on track for a drop in growth from the 11.9% annual pace of growth in the first quarter of 2010—seen as unsustainably and dangerously high—to something like 8% to 9% growth.  

That’s exactly the kind of growth rate that economists believe China can sustain without producing either galloping inflation or a huge asset bubble.

But markets apparently now fear that China is going to overshoot to the downside.

Other data today have added to that worry. The Indian version of the purchasing managers’ index fell to 57.3 in June from 59. In South Korea the index fell to 53.3 from 54.6 in May, Taiwan’s version dropped to 53.8 from 57.4.

There’s no doubt from these numbers that export growth is slowing in these economies—almost certainly as a result of the euro debt crisis and continued slow growth (or in some cases no growth) from the members of the European Union. China’s National Bureau of Statistics added to that picture when it said that exports continued to grow at a slower pace. The bureau called the outlook for exports “grim.” (Do note, however, that the bureau is talking about slower growth and not no growth.)

China’s domestic market will pick up at least some of the slack. Many of the projects authorized as part of the country’s $589 billion stimulus package in November 2008 are just now getting underway. Add in other projects funded by local governments or by loans from state-controlled banks and the total outstanding domestic stimulus is near 85% of GDP, Nomura Holdings economist Sun Mingchun told Bloomberg.

An increase in the minimum wage of up to 33% by nine provinces and cities that takes effect today and an increase in the national minimum month salary of roughly $24—or about 20%--will also add to domestic demand in China this year.

Stephen Roach, the almost always pessimistic economist now chairman of Morgan Stanley Asia, told Bloomberg that he sees the Chinese economy slowing to an 8% to 9% growth rate later this year—in a worst case scenario.

Of course, none of this has stopped Asian stocks from falling today. In Japan the Nikkei fell 2% and in China the Shanghai Composite dropped another 1%. The decline has been led by shares of manufacturers and exporters.

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