Sunday, August 01, 2010

China Manufacturing Growth Slows --- good news or bad?

This evening it has been reported that China's July manufacturing growth increased at its slowest pace in 17 months. While still at a level that indicates expansion, the modest decline may lead to a negative market reaction by traders, at least at the outset of market sessions.

Looking at the reasons for the lower number one could reasonably hope that any forward looking market would see this as a positive. Those reasons are that the "Chinese government has clamped down on property speculation and investment in energy-intensive and polluting factories" according to Bloomberg news. Those actions make it less likely that China will develop a fragile bubble economy that, as we all know, leads to a destructive pop.

It's somewhat analogous to the times when U.S. economic data shows lower housing starts. The market at times knee jerks down with the spectre of less housing materials and accoutrements being sold and fewer construction jobs. What is overlooked is that with a glut of houses on the market and declining prices, the last thing the economy needs at the moment is more houses that need to be sold. For any successful longer term recovery lower housing starts is, at this moment, a positive. China's moves are a positive as well but whether the market buys into that in the short term is tomorrow's market question.

With China still expecting full-year economic expansion of between 9 and 9.5%, the announced decline in manufacturing is the least of our global economic worries, or should I say that it should be.


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