People work at a production line at the Hanwang manufacture plant, China's biggest e-reader maker, in Yanjiao town, Hebei province.Jason Lee/Reuters
The din of hundreds of stamping machines punching out sheets of metal at the sprawling production facility in southern China suggests anything but a slowdown.
Scores of young workers sidestep massive rolls of steel, aluminum and copper that are scattered everywhere, vividly illustrating the Chinese economy's mammoth appetite for commodities.
However, officials at the Yangjiang Xinli Industrial Co. factory, which makes small motors, fish and turkey fryers as well as barbecues, say they aren't running at full capacity despite the approaching summer season.
The rapid expansion of China's factory production that has underpinned the country's staggering economic growth for the past decade is slowing.
Persistent inflation, high commodity prices and a series of measures by China's central bank to tighten monetary policy in an effort to combat rising prices and rein in a runaway property market are taking a toll.
Two surveys released Wednesday reveal that Chinese manufacturers expanded in May at their slowest pace in nine months. Other economic signals show factory output slowing elsewhere in Asia, including such high-growth economies as India, South Korea and Taiwan, as well as Europe and the United States.
The slowdown is causing concerns that the global economic recovery may be knocked off the rails by high commodity prices, falling consumption and a trend toward tighter monetary policies. Those concerns caused a selloff in stocks in North America and Europe.
The purchasing managers index tallied by JPMorgan-Markit for global manufacturing declined in May for the third consecutive month.
It was the biggest decrease since the depths of the financial freeze in December, 2008.
The U.S. Institute of Supply Management's measure of factory expansion plunged to its lowest level since September, 2009, and its biggest single-month decline since 1984. A similar gauge for the euro zone hit a seven-month low and Russia's version described industry in "near stagnation."
Slowing manufacturing in the world's leading driver of economic growth is a problem not only for China but for major commodity producers like Canada and big industrial exporters such as Germany, whose fortunes are increasingly linked to Chinese growth. Australia, which avoided the global recession thanks in no small measure to its burgeoning commodities trade with China, saw its gross domestic product sink 1.2 per cent in the first quarter, almost entirely because of a decline in exports.
The gloomier manufacturing outlook in so many key economies took a toll on commodity prices and stocks Wednesday, but most eyes remain focused on China and its prospects.
"Cooling off the economy is not such a bad thing," said Eswar Prasad, a Cornell University economics professor and an expert on China. "But the way the cooling is taking place, through a slowdown in industrial activity with the knock-on effects on employment and consumption, is not necessarily a good thing."
Even so, few analysts are ready to call an end to China's remarkable growth story and the decade-long commodity boom just yet. China and other emerging economies are slowing as they battle inflation, but there is little chance of a so-called hard landing due to overly aggressive policy intervention.
"I'm more inclined to think that this is just part of the soft-landing process," said Todd Lee, director of global economics with IHS Global Insight in Lexington, Mass. "It would be much more problematic if the economy continued to overheat despite these kinds of policies. Then the government would be forced to crack down even more, and the probability of a hard landing would increase."
China faces no risk of an economic crash, said Mr. Prasad, a former head of the International Monetary Fund's China division. "The government has enough control to keep the economy moving. Any signs of stalling, it can turn on the credit taps and it has a lot of room on the fiscal front."
In a boardroom perched above his factory floor, Liang YuanMin, president and general manager of Xinli's parent company, Henergy Investment Co. Ltd., takes a drag from a Double Happiness cigarette and lays out the changing realities of his business.
He's had to boost wages by about 10 per cent over the past year to counter rising inflation that has taken root across China. Still, he's doing a lot better than factory owners in Guangzhou and Shenzhen, about a three hours' drive east, where wages have risen by more than 20 per cent.
His biggest pressure, however, is the increasing cost of raw materials needed to build the barbecues that roll off the line bearing a host of well-known North American brand names.
"Prices are going up everywhere," Mr. Liang explains. "We do have good relationships though and order material at the low point of demand. We manage raw material cost fluctuations better than most."
Indeed, the Chinese economy is at an inflection point that could hasten the end of the commodity rally that has helped resource-rich Canada avoid the worst of the global recession. Policy makers in China are now confronting both stubbornly high inflation and slowing growth. A looming electricity shortage and a drought along the Yangtze River that has been called the worst in more than 50 years are only adding to worries that commodity prices are poised for a major correction.
"Persistently high inflation and slower growth, as shown again in the May PMI data, is not a good combination," Na Liu, the founder of CNC Asset Management and China adviser to Scotia Capital, said in a report.
But resource producers don't face any steep drop in demand from the transition now under way in China, at least not yet. "Calling it problematic for commodity markets would be too strong a word," said John Mothersole, who tracks global commodity trends for IHS Global Insight. "It will certainly mark a difference."
The "unwelcome" pairing of high inflation and slower growth is still only on the "psychological side" of commodities markets, said Mr. Liu, who continues to assign a "market weight" rating to the commodity sector.
Even though China's stock market indexes have fallen sharply in recent weeks, coal prices have been climbing and diesel, copper and steel product inventories are falling. "In the physical markets, there are many data points that suggest the markets are well supported, at least in the near term," he said.
Economists at Capital Economics in London said in a report that the "moderate" decline of the two purchasing manager indexes indicates China's ongoing economic slowdown is "gentle" and unlikely to lead to a hard landing.
"The PMIs suggest that growth is slowing, but not collapsing ... growth has continued steadily to slow since the beginning of this year, but GDP is probably still expanding at a yearly rate of around 8 to 9 per cent," Qinwei Wang, Capital Economics' China economist, said in a note.
Key to watch will be future policy moves by the People's Bank of China. China has tightened monetary policy at a well-defined pace of one reserve ratio hike per month and one interest rate increase every two months since December, 2010. That means a rate hike is due in early June. If the PBOC stands pat despite expected CPI inflation of 5 per cent, that could indicate Chinese policy makers have serious concerns about slowing economic growth.