China Cools Off

China’s manufacturing sector slowed more than expected in February. The nation’s Purchasing Managers’ Index dropped to 52 in February from 55.8 in January.

The culprit of the slowdown was a tightening of credit in China meant to slow inflation. That is at least what most economists say. But, it may not be true.

The growth in China’s exports has been suspicious and probably not sustainable. Developed nations may have needed Chinese factory goods in the fourth quarter to rebuild inventories. This inventory increase is widely viewed as the primary reason for the large 5.9% jump in US GDP in the last quarter of 2009. But, the inventory replenishment is now over and American companies and those in Europe, the UK, and Japan have to deal with weak conumer spending, low consumer confidence, and high unemployment. The drop in China manufacturing is probably the direct result of a sharp drop in the demand for its products which began around the first of the year.

China’s GDP is expected to grow 10% this year. The number is based to a large extent on improvements in GDP in the largest consuming nations and an upward movement in the consumption of China’s middle class. But, the developed nation’s are not consuming and China’s middle class faces a drop in credit availability as the central government pulls liquidity from the market to prevent bubbles in sectors including housing.

China’s manufacturing is down because the demand for it goods is down. That mean’s the nation’s GDP will not be up by the 10% this year that many economists have anticipated.

Douglas A. McIntyre