China’s (the world’s second economy) “official” manufacturing purchasing managers index (PMI) came in at 50.1 for the month of June, barely above the 50 level that separates expansion from contraction, and down from 50.8 in May, which was also below its historical average of 52.1, signaled the Chinese economy is stagnating at best.
 
Meanwhile, the “private” Caixin China General Manufacturing PMI for the month of July (the Caixin PMI is out one month before the official PMI) came in at 47.7, which was below its earlier released “flash” that printed 48.2 and now stands at a 2-year low and clearly in contraction territory. The manufacturing output contracted at the fastest pace since 2011. Purchasing activity also fell at the sharpest rate in three-and-a-half-years.

These latest data come after China’s National Bureau of Statistics informed last week overall industrial profits decreased from January to June by 0.7 percent on a yearly basis, which reinforces China's gloomy economic outlook for the near future.

For long-term investors, the latest China data are important. Any investor should keep in mind not only the emerging economies and the so-called commodity suppliers, but also the world’s developed economies will be hurt further by a continuously slowing Chinese economy.

It could be helpful taking notice during the decade up to 2014, Australia saw its exports as “share of its GDP” to China quadrupling; the EU and Germany saw their exports measured on the same metrics tripling while the U.S., Japan, Canada, Brazil, South Korea, Chile, etc. saw their exports, doubling according to a recent study done by UBS.

Sheng Songcheng, the director of the statistics division of the People's Bank of China (PBOC) was quoted by the China daily ‘National Business Daily’ saying: “… Downward pressure on China's economy will persist in the second half of the year as growth in infrastructure spending and exports is unlikely to pick up …”

He also added (this is very important) about the risks of local government debt that 2 trillion yuan ($322.08 billion) in bond swaps may not be able to fully cover maturing debt and the PBOC needed to step up the monitoring of local government financing vehicles given the current downturn in property market and limited local government revenues. He also expected Q2 net profit growth for banks to fall, adding that banks' exposure to risk “has become clearer.”

No wonder we see commodities going lower again.

The Bloomberg commodity index continues its slide and early this morning it was down 0.82 percent after having fallen more than 12 percent so far this year and +36 percent over the last 12 months.

At the same time, we are witnessing a broad-based commodity capex crunch that began last year and is gathering momentum.

The Standard & Poor’s “Global Corporate Capex Survey 2015” expects non-financial corporate capex to fall for a third-year running, declining 1 percent this year and 4 percent in 2016.

Energy and materials accounted for 39 percent of global capex in 2014, and their capital spending is expected to decline by 14 percent in 2015 and another 5 percent in 2016.

Interestingly, the survey also states North America was the only region delivering positive capex growth in 2014, but for 2015 it expects that to reverse. Nevertheless, S&P also expects renewed positive capex growth for North America in 2016-17.

North America remains the largest spender on capex globally and continues to gain share relative to other developed economies like Western Europe where capex growth remains static.

As a long-term investor the million-dollar-question becomes once again: “Where is growth finally going to come from?”

In the meantime, please keep in mind there a various issues that have the real potential of startling the markets and cause sudden bursts in volatility over the next few weeks while many people are on vacation and working on their tans.

About the Author: Hans Parisis
Hans Parisis is a regular contributor to the Financial Intelligence Report. To join the Financial Intelligence Report, click here. Click Here to read more of his articles.