Will China Sack the Fragile Global Recovery?

Just when you thought it was safe to come out from that rock you've been hiding under for the past four years, it appears China may be ready to send out its first smoke signals of distress.

Data released this morning by China shows that its PMI - a measure of manufacturing growth whereby anything over 50 represents expansion and anything under 50 contraction -- fell to 48.1 in March, led by a fifth consecutive month of declines in manufacturing activity. Although all five components that make up the PMI indicate contraction, none is more bearish than the new-orders subindex, which came in at a reading of 46.2!

If you recall, China had aggressively been raising its lending rate and tightening lending in order to control the rapid expansion of its economy and attempt to slow the meteoric rise in housing prices. With those policies now working (perhaps too well), the rest of the world is left wondering whether China can afford to support the rest of the globe on its shoulders or if the recovery is about to hit a wall.

Weakness in China has already been factored into many sectors, but I don't think anyone was prepared for the extent of the weakness in the manufacturing data this morning.

Mining and resource companies are likely first in line to feel the pain if China's economy continues to weaken. Being the biggest consumer of copper, Freeport McMoRan Copper & Gold (NYSE: FCX  ) could find the going difficult as China's purchases are largely responsible for buoying the price of copper. Similarly, Alcoa's (NYSE: AA  ) aluminum business, which is already facing poor pricing, could become even more depressed if China simply isn't building as much as it once was.

Not even energy stocks are immune. As the biggest consumer of energy in the world, coal stocks like Patriot Coal (NYSE: PCX  ) have begun idling its mines to bring output back in line with demand. It also doesn't help that natural gas prices are at decade lows and companies such as Cheniere Energy (AMEX: LNG  ) are striking deals to build liquefaction facilities that will export liquefied natural gas worldwide.

The trickle-down of continued weakness in China could even hit the technology sector. Sales of televisions have been anemic for years, but with China's growth slowing, those sales could actually get worse. Sony (NYSE: SNE  ) hasn't turned a profit in its television division in eight years, and it's likely that a protracted slowdown isn't going to get that division get any closer to the black.

In short, China has all of the potential to bring the global economy to its knees if it continues to contract. Clearly, it's impossible to tell exactly how bad it could get, but consider yourself warned that things are not moving in the right direction at the moment.

Will China turn itself around, or are we headed for the next major wave down? Share your thoughts in the comments section below.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Freeport McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's always on your side.


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  • Report this Comment On March 24, 2012, at 7:51 AM, onefutui2e wrote:

    the prevailing thought seems to be that china should allow its inflation to build up and run out of control just so that the "recovery" doesn't get tripped up? sounds like we're solving the bursting of one bubble by allowing another to form not all that dissimilar to what happened after the .com bust where real estate replaced tech stocks. china is doing something that other countries have lacked the fortitude or foresight to do. they are trying to regain control of things before their economy becomes overheated leading to a hard landing.

  • Report this Comment On March 25, 2012, at 7:07 AM, macroanalyst wrote:

    Very clearly, the current growth model for China, largely fueled by new loans coupled with high investment in fixed assets is not sustainable...The growth model needs to change and China surely has the potential to further depress global growth...

    http://www.economicsfanatic.com/2012/03/is-chinas-current-gr...

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