China Worries Bring Rocky Start To 2014

1/6/14 10:47AM EST

China Worries Bring Rocky Start To 2014 China Worries Bring Rocky Start To 2014

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China is on the verge of collapse. The story has been around since 2012, and it doesn’t’ appear to be going away. Concerns raised by the story were addressed by the country’s Communist Party in its Third Plenary Session of the 18th Communist Party of China, but investors are still worried about the future of the country’s growing economy. Those worries have been brought to bear on world markets in the early days of 2014, and they may be an important thread through the rest of 2013.

On Monday morning data from the East-Asian giant showed that growth in the service sector slowed significantly. The release seemed to have a significant depressing effect on the markets across Asia, and resulted in a less than optimistic start to this week’s trading. The shake shows that worries about Chinese stability are still a major theme, and it is likely to remain so until some resolution is met.

China Service Worries

Data from China’s National Bureau of Statistics showed that the service sector slowed to a four month low in December, hitting 54.6 on its scale, down from 56 in November. A similar study, the Purchasing Managers Index from HSBC/Markit Economics showed a similar slow down, from 52.5 to 50.9 on its scale. That scale is now at its lowest level since 2011.

The slow down in the service sector follows last week’s reports on manufacturing in the country. Those reports showed that growth in the secondary sector also hit lows in December. Economists and analysts have warned of a slow down in the country’s growth rates for months, and the country’s government has said it is alright with slowing growth as it tries to re-engineer its entire economy.

The Third Plenary Session of the 18th Communist Party of China concentrated on changing China from an export focused, low-wage economy to one based on consumer demand. As growth remains sluggish across the world, however, multi-national companies are relying more and more on growth in the country. That leaves investors worried about earnings heading into 2014.

China Collapse Immenent

The narrative surrounding Chinese slowdown does not end there, however. The country is, according to the pessimistic theories, built on a house of cards. Corruption, bad debt controls and a massive shadow banking system will necessarily lead to a huge collapses according to that theory. An economic depression could lead to widescale political problems in the country, and that would change the prospects of almost every public company in the world.

There is no guarantee that China is heading in direction or another. Several different views from economists have varying degrees of support, and predicting the future isn’t all that easy. What is clear from this morning’s movements in emerging equities is that the market is going to be strongly impacted by risk from the country in the year ahead.

American investors concentrating on American investments are just as vulnerable to problems in China as those in emerging markets. They cannot afford to ignore the problems faced in the country, and they should factor in the risks as they look to invest in a new year.

 
 

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