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What China's Stagnating Economy Means for the World

By Dan Carroll | The Motley Fool

Crunch! That's the sound of China's manufacturing sector as the slowdown intensifies in the world's second-largest economy. The country's once-powerhouse economic growth has slowed from a double-digit percentage rise just a few years ago to growth of less than 8% projected for this year, and manufacturing has fallen right alongside that number. HSBC's Flash Purchasing Managers Index for China, showing the health of the manufacturing industry nationwide, declined to 48.3 in June, dropping nearly a full point from May's reading and now solidly in contraction territory.

A massive credit crunch in the country is exacerbating manufacturing's problems, as lending dries up in China's financial sector and companies turn to Hong Kong for cash. In response, Hong Kong's interest rates have skyrocketed. Is China's amazing growth story finally on its last legs -- and more importantly, what does this worsening decline mean for the rest of the world as America tries to continue its nascent recovery and Europe looks to dig out of recession?

What the crisis means to China
Danger, China and emerging-markets investors: While many have pointed out the upside of emerging markets -- myself included -- China's cash crunch isn't restricted to just China. Nearly $4 trillion of cash has flowed into developing nations over the past four years, according to Bloomberg Businessweek, but a stronger dollar buoyed by the likely tapering of U.S. quantitative easing, along with weaker emerging-market economies, could see cash inflows and investments in emerging economies wane. Already, cash inflows in China were reported in June to increase by the smallest amount since last November.

That's helped destroy the iShares MSCI Emerging Markets Index fund (NYSEMKT: EEM  ) , which has lost a crushing 15% over the past month alone....more

How will the West fare?
China's manufacturing slump isn't what Europe needed to hear about. China is the European Union's largest export source, but the manufacturing slump will cut into the sector's demand. That's not good for leading European materials and industrials companies, particularly as machinery and transportation equipment make up some of the EU's largest export categories to China. A brewing trade spat between the two blocs isn't helping, and a few industries have even more to worry about.

Beijing's subsidies to domestic materials producers has made life tough for leading companies in the industry, such as the world's top steelmaker, Europe's ArcelorMittal(NYSE: MT  ) ....more

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