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Growth Investors Take Heed: China's Slump is Getting Worse

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Hardly a week goes by in China without economic trouble rearing its head these days. Chinese manufacturing was the victim this week, with the country's purchasing managers' index falling into contraction territory, according to a study from HSBC and Markit. The reading hit the Hang Seng (UNKNOWN: ^HSI  ) hard, but the index recovered well, to end the week up 1.5%. That's not been enough to counter the index's poor results in 2013, however: Year to date, the Hang Seng's fallen more than 12%, outpacing most other world indices in the race to the bottom.

Is China still a safe bet for investors looking for growth prospects?

Manufacturing slumps into contraction territory
Manufacturing is only part of China's greater slowdown. Exports have been hit hard by the cash outflow from the country in recent times, and the problem has only worsened lately. The Fung Group's Business Intelligence Center said this week that a measure of export orders from China's PMI fell to a reading of 47.7 -- more than two percentage points into contraction territory, and the lowest mark since February.

That's not good for an economy reliant on exports for growth. Already, rising costs in manufacturing and labor have hurt China's export sector, as businesses leave for cheaper pastures. Combined with the country's slowdown in infrastructure spending, the sector's future for businesses and growth as a whole look bleak.

China's at least taken a step forward in resolving its ongoing trade dispute with Europe, one of the nation's largest export customers. The European Union earlier accused China of dumping cheap solar panels to flood the European market, and while the EU is still on pace to impose punitive restrictions on Chinese solar imports come August, the two governments are reportedly making progress in easing tensions.

It's a sign that relief could be coming for tense investors in Chinese solar firms, one that sent shares of major solar companies surging earlier in the week. Yingli Green Energy Holdings's (NYSE: YGE  ) stock surged by more than 13% on Friday, part of an 18% gain for the week. With more than 50% of total Chinese solar exports going to Europe, Yingli and other solar rivals are reliant on the EU's willingness to deal with Beijing in order to avoid costly tariffs.

Deutsche Bank has given the solar stocks its seal of approval at least, even with regulatory hurdles still in the way. The bank expects margins to improve at select solar firms, and Deutsche Bank analyst Vishal Shah gave a "near term positive bias" to Yingli, among others. Bloomberg Industries added its expectations that raw material costs will decline, along with rising prices, in a move that could help buoy the sector despite some firms' struggles to reach profitability.

Solar wasn't the only Chinese sector to break into the green this week and defy manufacturing's gloomy outlook. Search engine firm Qihoo (UNKNOWN: QIHU.DL  ) picked up more than 3.3% on Friday alone after the company reportedly increased its Chinese market share to 15%. Qihoo's grown rapidly, although with size could come slower growth in the future, especially as the firm goes up against Chinese search heavyweight Baidu (NASDAQ: BIDU  ) for market share. Baidu still holds the Chinese market in a vice, even as the firm's market share slipped below 70%, according to tech site TechinAsia. The battle for Chinese search clicks should be an interesting and lucrative fight in the future between these two firms, as more and more of China's growing middle class expands online.

Growing stocks like Qihoo and Baidu offer strong options for growth investors, but China's manufacturing engine has ground to a halt. Should you be worried about the end of the "Made in China" era? The Economist compares one disruptive invention to the steam engine and the printing press. Business Insider says it's "the next trillion dollar industry." And everyone from BMW, to Nike, to the U.S. Air Force is already using it every day. Watch The Motley Fool's shocking video presentation today to discover the garage gadget that's putting an end to the Made In China era... and learn the investing strategy we've used to double our money on these three stocks. Click here to watch now!

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