HSBC Warns that China's Economy is Slowing Down

The latest data from a monthly HSBC HBC survey on Chinese economic activity shows that China's rapid economic growth continues to cool. Although the HSBC Flash China Purchasing Managers' Index (PMI) for February rose to 49.7, up from 48.8 in January, anything below 50 is considered a sign of economic contraction. The Chinese flash PMI is an early look at the results of a survey sent to managers at manufacturers across China. HSBC says that the flash PMI is the earliest monthly indication of economic conditions in China. The HSBC survey also highlighted weakness in the Chinese export sector, as new export orders reversed course, dropping from 50.4 in January down to to 47.4 for February. The HSBC PMI survey is just the latest indication that China's economy is losing momentum. January trade data indicated significant weakening in Chinese domestic demand, as well as weakening demand from the European Union. The January data revealed that Chinese exports and imports fell to their lowest level in two years. Chinese officials had hoped that other earlier indications of an economic slowdown in January were the result of the Chinese Lunar New Year holidays, which usually see many factories either reduce output or shut down altogether. However, a growing body of data is sending warning signals that the world's second biggest economy is losing steam. Falling demand in the European Union caused by the euro zone's financial crisis could be the biggest factor in China's economic slowdown but Chinese domestic demand is also showing signs of weakness. Just last month, the International Monetary Fund (IMF) warned that if economic conditions in the European Union and the United States worsened, Chinese economic growth could be cut in half. Chinese officials' biggest economic concern over much of the past two years has been fighting inflation that could lead to social unrest if left unchecked. As inflation eased over the last half year, the focus shifted to supporting economic growth. However, signs of rising inflation in January caused observers to question what China's economic policy priorities would be for the next few months. The HSBC Flash China Purchasing Managers' Index will give Chinese officials more justification to stop worrying about inflation and focus their efforts on promoting economic growth. China already lowered its reserve requirement ratio (RRR) for banks to to 20.5 percent over the weekend, which was the second reserve requirement ratio reduction in the last three months. The flash PMI is the based on the responses of about 85 to 90 percent of the respondents and the final results are set to be released on March 1. If the final HSBC PMI survey results show an even greater contraction than the initial results, the outlook for China's economy will be even gloomier.