A contraction in Chinese manufacturing has sparked fears of a hard landing in that country and an overall global slowdown. But that could actually prove a positive for U.S. economic growth.
Stock and commodity markets stumbled Thursdayon news that a key Chinese factory index hit a four-month low, showing the sector is contracting. U.S. equities shed nearly 1 percent at their lows, while oil and metals also both suffered sharp losses on fears that a China slowdown will reverberate across the globe.
But experts on the world's second-largest economy see the drop as signaling only a cooling off, not a plunge.
Moreover, they say, the U.S. could benefit from a China slowdown that could slow escalating energy costsas well as provide an opening on the world manufacturing stage.
"I don't think anybody could have expected that China was going to grow (gross domestic product) at 8 percent into perpetuity," says Barry M. Sine, director of research at Drexel Hamilton, a New York-based broker-dealer. "The growth had to slow down. But it's still just an incredible growth rate."
Sine does not expect China to see the hard-landing scenario generating market apprehension over the past several weeks.
"Here's a country with $2 trillion in cash sitting in reserves. They can do an awful lot in terms of stimulating any weak segment in the economy, whether it's real estate, bank balance sheets, state-owned industrial companies," he says. "It's like the lottery question: What could you do with a million dollars? What could you do with $2 trillion?"
Moreover, if Chinese manufacturingshould stay in contraction mode — the HSBC Purchasing Managers Index registered a 48.1, below the 50 that indicates expansion — American businesses could end up the beneficiary.
The HSBC survey found that Chinese export orders were "sluggish" while domestic demand was "still softening."
"One of the fundamental stories in the U.S. economy is we're seeing manufacturing come back," Sine says. "Companies like Caterpillar are bringing jobs back. GM is hiring again, and even the Japanese auto companies, they're starting to produce in the U.S. and use that as an export base."
Another way the slowdown could work in favor of the global economy is the likelihood of more stimulus from the Peoples Bank of China.
While the PBOC had been tightening policy to quell inflation fears, an economic slowdown likely would give the central bank the impetus it needs to enact more aggressive easing. That comes at an important time given that the Federal Reserve has been ambiguous about its plans for a third round of quantitative easing
"When you have these weaker-than-expected PMI numbers that come out of China, that in itself provides an easier backdrop for the government as well as the PBOC to stimulate through policy easing," says Joseph Tanious, global market strategist at JPMorgan Asset Management. "Now that inflation numbers in China have begun to roll over, we think the PBOC can shift its gears and try to focus on economic growth."
The probability of policy easing "bodes well for a soft-landing story" while a likely decrease in energy prices represents "a net positive as far as the U.S. economy is concerned," Tanious adds.
Yet investors are unlikely to be as dismissive about China concerns.
Some big market names, most notably hedge fund titan Jim Chanosat Kynikos Associates, have turned bearish on the country in part due to a weakened real estate market and because the country has instituted more than 350 deals over the past five years worth about $400 billion, many of which appear shaky.
Shelley Goldberg, director of global resources and commodities strategy at Roubini Global Economics, helmed by the famed "Dr. Doom" Nouriel Roubini, cites "wasted, unproductive investments" that "at the end of the day are going to result in a choke on growth in the coming years, and there's really no offset."
The most likely economic outcome for China, Goldberg says, is a hard landing that likely will not be felt completely for a few years.
"We do expect some easing toward the property markets in 2012 and a partial bailout of local government banks and developers in 2013," she says. "It's really a longer-term issue and there's a number of things they need to do which they're not really doing."
In the commodity markets, industrial metals are likely to suffer the most, followed by energy and then grains, Goldberg says.
In stocks, though, strategists expect that the recent slowing in the U.S. market rallyis as much about a natural pause than it is about larger concerns. After all, American stocks have rallied more than 30 percent since October, so a correction here likely would be positive and provide a better entry point for investors on the sidelines — another, if coincidental, benefit from China slowing.
"People are on pins and needles waiting for the next correction," says Drexel's Sims. "They want to book those gains before they lose them."
Tanious says JPMorgan remains positive overall about the stocks outlook, despite the questions over China's growth.
"You had a tremendous rally in the markets year to date. Investors are looking for opportunities to take some gains," he says. "So long as the global economy continues to pick up steam, which we think it will, equities will head higher from here. The pace of the rally you've seen is unsustainable."