The Hang Seng's Bounce Hasn't Stopped China's Slowdown

The Hang Seng's Bounce Hasn't Stopped China's Slowdown

China's markets have been anything but an investor paradise this year. Hong Kong's Hang Seng has battled back from its May lows with a strong July that saw the index gain nearly 7%, but that hasn't taken its year-to-date performance out of the red. China's economic growth is still the envy of the world, but the country's GDP growth is slowing, as problems rise across the country. What's plaguing China's markets, and are international stocks based outside of the country safe from its downswing?

Investments taking a hit
China's manufacturing both gained and fell last month -- depending on which index you follow. The state's official purchasing manager's index showed across-the-board gains and a slight uptick in the sector's growth, rising to a reading of 50.3, just above the break-even mark of 50 that signals neither contraction nor expansion. However, HSBC's own PMI mark, which also includes a broader array of smaller firms, showed the sector falling to an 11-month low of 47.7, deep into contraction territory, and down 0.5 points from June's mark.

Chinese stocks gained on the official reading, but it's best not to ignore the HSBC mark. The country's manufacturers have been hit with a double blow of oversupply and limited credit availability due to the nation's cash crunch, and it's doubtful that the sector overall will show a marked bounce back to anywhere near strong growth -- even if China's economy stabilizes around the 7.5% growth mark it showed for the second quarter.

Some aren't so convinced about the country's strength in the midst of its slowdown. Singaporean wealth fund GIC Pte claimed this week that China's slump will impact investments and markets around the world. GIC particularly highlighted the danger to emerging markets from China's slowdown, especially as smaller developing economies like Vietnam and Indonesia have benefited greatly from the country's boom in recent years.

The slowdown has certainly hit Chinese stocks hard. Sinopec , the country's state-owned Big Oil major, has seen shares fall by double-digit percentages this year, despite the company's dominant position in its industry. The company's working hard despite the plunge: Sinopec reportedly is in talks with Weatherford International to form a joint oilfield services firm that would become China's largest of its kind, according to Reuters. Weatherford is trying to key in on future growth in the nation, as energy demands intensify with China's growing middle class and cities. For Sinopec, however, China's slowdown has hurt the company through weaker demand. Long-term trends, such as a growing auto market and larger urban populations, are in Sinopec's favor, but in the short term, investors need to prepare for a bumpy road.

It's not the slowdown that's hampering China's health-care sector, on the other hand -- it's allegations of deep-set corruption. GlaxoSmithKline's rash of employee arrests is common knowledge by now, but even firms like Baxter have joined the unfortunate party. Baxter said this week that a Chinese joint venture showed expense violations, although the company quickly enacted discipline, and has so far avoided attention from Chinese authorities. Still, bribery's on everyone's mind in China's health-care sector. For such a promising market -- China's expected to become the second-largest health-care market in the world this decade behind only the U.S. - it's been a tough time for health-care investors across the Pacific recently. It's unlikely we've seen all there is to this sector's development.

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