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China optimists are standing on a thin reed of hope.
The latest negative signal came with February's HSBC flash Manufacturing Purchasing Managers' index, which fell to 48.3, indicating contraction. Usual caveats apply about the Lunar New Year holiday messing with economic data. Still, investors sniffing out a hard landing for China sent China-exposed shares and currencies lower.
If there was a sliver of good news in the report, it was that the export-orders component rose slightly, though it remains in negative territory. The forward momentum could lend support to a thesis that China's growth this year will be better than expected thanks to a resurgence in global trade.
RBS economist Louis Kuijs figures China can handle Beijing's engineered slowdown in credit-fueled investment partly through recoveries in export demand from the U.S. and Europe. He estimates China will grow 8.2% this year, above the mid-7% consensus.
The trouble is it will take a much faster rebound in the developed world to give China the same export bang for the buck that it got last decade. Plus, China's rising wages and currency make it less of a no-brainer as a source for manufactured goods.
It also isn't clear that fast growth in the U.S. — this time driven by energy investment and a tech boom rather than, say, building and fitting out new homes — translates into imports at the same intensity.
The export-recovery thesis could pan out. China isn't going to lose its global manufacturing edge so quickly. But it also shows an uncomfortable truth: A few years ago China was resilient enough to grow as the world collapsed around it. Now it needs the world to grow to prevent its own economy from turning sideways.
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