These Countries Are Toast If China's Economy Lands Hard

China's June trade numbers shocked the world earlier today.  Exports unexpectedly plunged 3.1% year-over-year, missing expectations for a gain of 3.7%.  Imports declined by 0.7%; economists were looking for a 6% increase.

Fears of a major slow down in China will have the country's major trading partners on edge.

The countries with the most exposure are obviously its Asian neighbors.

Here's Morgan Stanley on the Asian countries with the most to lose:

China has played a key role in the region’s development over the last three decades. The region’s dependence on China has also increased sharply over the past five years as China emerged as a key source of end demand at a time when the US, Europe and Japan slowed significantly post the credit crisis. The slowdown in China’s growth will be transmitted to the rest of the region largely via trade and financial linkages.

Korea and Taiwan: Impacted by Direct Trade Linkages

In the case of Korea and Taiwan, our economist, Sharon Lam, believes that Korea is likely to be affected more than Taiwan in a China slowdown scenario because Korea’s exports to China are mainly for China's domestic consumption and investment. Taiwan, on the other hand, as a global major tech component supplier, uses China as a re-export base. While Taiwan has heightened its cross- strait economic and commercial ties with China after the signing of the Economic Cooperation Framework Agreement, we believe that such a relationship and its positive economic impact will be less affected by the domestic situation in China.

Morgan Stanley

Australia: Impacted by Weaker Commodity Prices

Slower growth in China will imply a slower rate of consumption of key commodities such as iron ore, steel, aluminum, copper and coal, putting downward pressures on prices. In this context, the net commodity exporters in the region such as Australia, Indonesia and Malaysia will be most impacted. Australia has been a key beneficiary of higher commodity prices over the past few years. The rise in commodity prices has lifted Australia’s terms of trade, and exports growth has also been rising on the back of a rise in mining exports. This, in turn, has led to a rise in mining capex, which combined together has provided support to the growth rates in Australia. Hence, as commodity prices remain weak, we believe that the Australian economy could face some challenges in maintaining a strong growth trajectory.

Morgan Stanley

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Read more: http://www.businessinsider.com/major-exporters-to-china-chart-2013-7#ixzz2YeOEBoTp

China's Latest Economic Data Dump Stunk

The latest batch of economic data from China suggest that growth continues to be sluggish. 

Let's walk through each of them. 

First, industrial production climbed 9.2% on the year, slightly below expectations for a 9.4% rise. Industrial production in May was led by heavy industries, with steel products up 11.3% year-over-year (YoY), up from 8.1% in April. Auto production slowed to 15.7%, from 18.3%, according to Bank of America's Ting Lu. 

Second, fixed asset investment (FAI) was up 19.9% on the year, and year-to-date FAI was up 20.4% on the slightly below expectations for a 20.5% gain. Remember FAI is a good gauge of a country's investment activity. 

A breakdown of FAI activity showed that manufacturing FAI eased to 16.5%, from 17.9% because of "sluggish" external demand. Railway FAI slowed significantly to 24.2% YoY, from 62% in April. But year-to-date railway FAI was up 24.5%, compared with -41.6% last year for the same period. Planned investment, which is a leading indicator of FAI eased to 15.4%, from 17.9%. And finally, property FAI fell to 19.4%, from 23.2% the previous month. 

For the month of May, Lu writes that the 2.9% fall in producer prices could cause real FAI to rise a bit. 

Third, retail sales climbed 12.9% on the year, in line with expectations. Industries impacted by the government's crackdown on corruption, like the restaurant industry saw revenue rise 9.2%, from 7.9% in April. Gold and jewelry sales were up 38.4% because of weakness in gold prices. 

Fourth, consumer prices were up 2.1% and producer prices fell 2.9%.

What does all of this mean?

Lu writes that the latest data suggests that Q2 GDP growth will be 7.6 - 7.7%, and quarter-over-quarter growth should be 1.8%. 

But the government, that is looking for about 7.5% growth for 2013, is unlikely to announce new stimulus and is expected "maintain the current accommodative fiscal and monetary policy."

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Read more: http://www.businessinsider.com/may-chinese-data-suggest-sluggish-growth-2013-6#ixzz2Vjgu5SCg

Indicators present muddled picture of China's factories

What's going on with China's all-important manufacturing sector?

Economic reports seeking to gauge activity in China's factories during the month of May have presented investors with a muddled picture, with official indicators from the state outpacing those of private forecasters.

Investors typically pay attention to two separate purchasing managers' surveys conducted in China: one is performed by the state, the other by global bank HSBC.

Most of the time, both surveys deliver results that indicate factory activity is either expanding or contracting. But the surveys occasionally diverge, with one indicating growth and the other a slowdown.

That's exactly what happened in May.

The official government PMI released over the weekend came in at 50.8 for May, topping economist expectations and boosting the index by 0.2 points over the previous month. Meanwhile, the HSBC survey came in at 49.2, the first time since October the index has dipped below 50. Any reading below 50 signals deterioration in the manufacturing sector.

There are a few reasons why one survey would suggest China's factories are gaining momentum, while the other indicates slower growth.

China's official measurement is heavily weighted toward large enterprises in China, while the HSBC survey has a smaller sample size and places a greater emphasis on smaller firms.

The surveys also use different methods to perform seasonal adjustments -- a way to smooth data and make it comparable from year to year. According to economists at Societe Generale, the surveys go in opposite directions about a third of the time, usually due to differences in these adjustment techniques.

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The strength of manufacturing in China is considered a barometer of the global economy because of the nation's role as a powerhouse exporter.

According to Hongbin Qu, chief China economist at HSBC, the bank's survey suggests that conditions were weakening toward the end of May, and will pressure Beijing to boost demand.

"With persisting external headwinds, Beijing needs to boost domestic demand to avoid a further deceleration of manufacturing output growth and its negative impact on the labor market," said Qu.

A clearer picture of factory conditions in China will emerge later this month, when industrial production data is released. Societe Generale economists call this "the moment of truth."

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China recorded its weakest growth in 13 years in 2012, but the world's second biggest economy rebounded in the fourth quarter to post growth of 7.9%.

Growth slowed again in the first quarter to 7.7%, a weaker performance than economists were expecting but still ahead of the government's annual target of 7.5%.