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A Key Indicator Shows Weakness In China’s Economy

You’d think from the official statistics that China’s economy was on fire. But a key metric indicates there could be trouble ahead for the second largest economy.

On the one hand the Chinese economy is said to have grown at almost 8% in the quarter through July, according to government data. That’s pretty impressive growth even for an emerging market economy like China.

Soft Steel in China

But on the other hand, more recent data shows a troubling weakness in the country’s steel production. It fell 13.2% in August versus the same month a year ago, according to data from the World Steel Association. That really matters because China produces more than half the world’s steel — or almost a billion metric tons in 2019 — much of which is used in the country’s manufacturing and construction industries. In other words, a weakness in steel production is tantamount to an indication of softness in China’s manufacturing and construction base.

Worse, still China is the only country int he top 10 steel producers to see a decline in steel output over the same period. Japan, the U.S. and Brazil all saw double digit increases, according to the World Steel Assn. data.

Deja Vu All Over Again?

I wrote about a more dramatic Chinese steel production slowdown in June 2015, arguing at the time that it likely augured bad economic news for the communist country. Sure enough in August 2015 poor economic news emerged from China sending global markets crashing.

For that reason, investors might want to be cautious about holding stocks with exposure to China such as those in the iShares MSCI China ETF
MCHI
. It’s already down 7% over the year through Friday, according to data from Yahoo.

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