Hang Seng Down 3% as Contagion Spreads to China

Economic contagion has spread to China, as the markets there signal deep concern. The Hang Seng fell 3% overnight as the reality that Europe will undermine growth in the People’s Republic set in. The recession in Europe has been joined by forecasts that the U.S. economy may have grown little better than 1% in the second quarter. China’s manufacturing machine has run out of places to export its goods.

The Hang Seng is made of a “who’s who” of China’s largest companies, which makes it a reasonable proxy for the nation’s industrial, financial and infrastructure firms. Among the largest corporations with stocks that are components of the index are Sinopec (NYSE: CEO) and PetroChina (NYSE: PTR), oil companies that are as large as any in the west. China’s largest banks and financial firms also are part of the index, as are telecom firms China Unicom (NYSE: CHU) and China Mobile (NYSE: CHL). The sectors represented make the index much broader than the DJIA as a representative of the national economy.

The presence in the Hang Seng of companies that do most of their business inside the People’s Republic indicates that capital markets investors now worry about the fire power of China’s middle class, which is by some estimates is as large as 200 million people. If this part of the economy is crippled along with the export sector, China’s economy no longer has a leg to stand on. That would bring a sharply lower growth rate in the second half of 2012 into play.

China’s central government expects 8% expansion in the third and fourth quarters. Those forecasts are already way too high. Investors in China’s stocks have figured that out.

Douglas A. McIntyre