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China: From Driver to Drag on Global Growth

Sunday, 30 Jun 2013 | 11:07 PM ET
Stringer | AFP | Getty Images

The continued decline in China's manufacturing activity, reflected in twin manufacturing surveys released on Monday, highlights the risk the world's second largest economy now poses to global growth, experts told CNBC.

China's official purchasing managers index (PMI) slipped to 50.1 in June from 50.8 in May, according to data from the National Bureau of Statistics. The final reading of HSBC PMI, meanwhile, fell to a nine-month low of 48.2, below the flash estimate of 48.3 and down from 49.2 in the previous month.

A reading above 50 indicates expanding activity and one below 50 signals contraction.

(Read More: Even Resilient Yuan Is Feeling China's Pain)

"I think the story for China is basically that there is no story left. Economic activity in China has peaked and we think that data will surprise on the downside," Sailesh Jha, chief strategist at Arcus Capital Singapore, told CNBC on Monday.

A weakening of both external and domestic demand weighed on manufacturers last month, with falling orders and rising inventories plaguing factories, HSBC said, driving the index further into contractionary territory.

Both the official and HSBC employment sub-indexes showed that job shedding intensified last month. The pace of job cuts was the fastest since last August, the HSBC sub-index showed.

China PMI Will Drag on Global Growth: Pro
David Poh, Regional Head of Asset Allocation at Societe Generale Private Banking analyzes the latest factory activity from the mainland, and explains why the global economy will be affected.

David Poh, regional head of asset allocation at Societe Generale Private Banking, said that rather than powering the world economy as it has done in recent years, China is now becoming a threat to global growth.

"China plays a very big part in the global growth – if this trend continues to go down its really bad for the entire world," Poh said.

"33 percent of exports go to the euro zone, and we know the euro zone is still licking its wounds, Australian [mining] companies are highly dependent on Chinese growth. Latin America is the same thing. U.S. consumption may slow down too if the whole global economy isn't going as planned," Poh said.

(Read More: China PMI Slump Will Test Authorities' Resolve)

According to Nomura, softness in the manufacturing sector is set to continue as tight liquidity conditions dampen economy activity. The bank forecasts the official PMI will fall below 50 in July.

"The weak PMI reinforces our view that there is 30 percent chance GDP may drop below 7 percent in third quarter or fourth quarter," wrote Zhiwei Zhang, chief China economist at Nomura.

Hongbin Qu, chief economist, China & co-head of Asian economic research at HSBC agreed that growth is likely to continue slowing in the coming months as Beijing refrains from using stimulus. Last month, the bank downgraded its growth forecast for China from 8.2 percent to 7.4 percent, below the government's target of 7.5 percent.

(Watch Now: What China Has in Common With 1979 America)

China's president Xi Jinping said in a speech reported by Xinhua news agency at the weekend that the performance of leaders should not be evaluated simply by GDP growth, underscoring the government's recent reluctance to embark on further stimulus programs.

Xi said factors like welfare improvement, social development and environmental indicators should also be used to assess leaders.

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