The latest data pointing to a hard landing for China

Signs of a hard landing in China continue to materialize this week as a slew of new data point to slowing growth in sectors vital to the Chinese economy.

Shanghai skyline image courtesy Flickr user Emille Bremmer http://www.flickr.com/people/echbremmer/The HSBC/Markit Purchasing Manager’s Index came in Thursday with a score of 48.1, a four-month low (a number above 50 indicates increasing growth). As well, China’s Manufacturing Output Index number was only 47.9, a two-month low.

Further, Japanese trade data also indicate a slowdown in the Chinese manufacturing sector. Japan reported that exports to China shrunk 14% in February due to a precipitous decrease in machinery demand, indicating that construction activity in Mainland China remains depressed.

According to Adrian Mowat, chief Asia and emerging markets strategist at J.P. Morgan, China is already experiencing a hard landing: “Car sales are down, cement production is down, steel production is down, construction stocks are down.”

Stocks with exposure to the Chinese manufacturing and construction sectors like Caterpillar (CAT, quote), VALE (VALE, quote), and BHP Billiton (BHP, quote) could be adversely affected by a prolonged slowdown in China.

With Wen Jiabao’s recent admission that Chinese housing prices are still inflated, combined with speculation over the health of China’s banks in light of potentially toxic loans, China-focused ETFs with heavy exposure to these sectors like FXI (FXI, quote) and YAO (YAO, quote) could encounter bearish pressure in the near future.

Bearish signals are not confined to manufacturing and housing; fears of declining advertising revenue have halted Baidu’s (BIDU, quote) gains over the past few weeks. 

One bright spot continues to be the Macao gaming sector. These stocks have been on fire ever since February monthly gaming revenues from the former Portuguese enclave came in higher than expected. Macao’s March numbers, expected during the first week of April, will paint a clearer picture of the extent to which stocks like Melco (MPEL, quote) will be affected by a Chinese slowdown.

Given the aforementioned problems and Europe’s likely recession — the euro zone is China’s largest trading partner — all likely to fester for some time, fears of a hard landing in China are growing.

BIDU is trading higher on Thursday; JPM, CAT, VALE, BHP, FXI, YAO, and MPEL are all trading lower.

Disclosure: Immediate family members are long CAT, VALE, and MPEL.

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