The big X-factor for the stock market in the coming months will clearly be China. During periods when any of the major weekly or yearly cycles are bottoming and the market is vulnerable to a correction, there’s always a news headline event that serves as a scapegoat for the market’s weakness. Last year the scapegoat was Greece and the eurozone debt crisis. This year the void will be filled by China’s slowing economy.
Underscoring the growing worries over China, Tom Orlik wrote in the March 26 issue of the Wall Street Journal: “Markets fear a slowdown in China’s factories. They should also be concerned about possible government instability.” He went on to explain that China’s real estate investment showed no growth from a year earlier and that export growth slipped to 6.8% from 14.2% in the fourth quarter of 2011.
Moreover, a quarterly survey by China’s central bank showed demand for loans at its lowest since the financial crisis of 2008. The HSBC purchasing managers’ index registered a reading of 48.1 for March, below the 50 mark that historically signals contraction and suggesting that China’s manufacturing sector is shrinking.
China’s economic slowdown was preceded by a major peak in its stock market in July 2009 after the post 2008 global market rally. China’s Shanghai Composite Index was the first of the major global markets to peak following the post-credit crisis rebound, and it has been in a general slump ever since (see chart below). Charles Dow, of Dow Theory fame, asserted that the stock market typically discounts economic recessions by several months in advance. In China’s case its equity market was discounting an economic slowdown by a couple of years in advance. This was due no doubt to the country’s stratospheric growth of recent years and the residual economic momentum which kept its GDP forging ahead long after its stock market peaked. Yet the downward trend visible in the Chinese stock market since 2009 was sending an undeniable signal that leaner times were and are ahead for the country’s economy.
Illustrative of the stock market’s leading indication over the economy, ever since China’s equity market peaked in 2009, China’s GDP growth rate has peaked and its economy has slowed. This has also had a measurable impact on the global market for commodities. Oil demand has fallen even though a number of observers continue to attribute high oil prices to China’s voracious appetite for fuel. The International Energy Agency (IEA) recently noted that oil demand has declined for the first time the global economic crisis of 2008. The IEA blamed mild weather, high prices and the likelihood of a global recession for the drop in demand, but a more likely culprit is China.
Gold and silver demand has also been in decline since last year. The sluggish demand is blamed by many traders on fears that China’s formerly voracious demand for metals may be waning, especially if its economy continues to slow.
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