CHINA'S PMI FELL BELOW 50 IN APRIL. WHAT ARE THE IMPLICATIONS

China's April PMI fell below 50 for the third straight month. A reading below 50 indicates a contraction.

In the last six months, China had reduced interest rates three times. China had also lowered the banks' required reserved ratio in April. All this points to adding more liquidity into the market. Buy why? China is facing economic slowdown. All these actions are intended to spur the economy to grow more robustly. 

But China is already facing a tremendous debt burden with many state owned firms owing the banks trillions of dollars, with much of the money going into building the infrastructure and providing financing to developers to build luxurious properties. Several luxurious projects had later become ghost towns. A number of developers are now on the verge of defaulting on their debts. Only as recently, the public listed Kaisa Group defaulted on its debt.

Will adding more liquidity in the system helps the economy or delaying the inevitable fact that a bubble is coming, and by virtue of pumping more liquidity into the market serves only to enlarge the bubble.    

The major worrying factor in China  is the shadow banking which economists predicted at roughly 3 - 4 times the banks' loans.

A recent study by McKinsey Global Institute estimated that China's total debt has grown from US$7.4 trillion to US$28.2 trillion in the period from 2007 - 2014. This is akin of the debt growing from 158% of GDP to 282% of GDP in the same period of time. 

China slowdown will impact many Asian economies. A spate of interest rates reduction have been triggered across Asia in the past one year. When a Central Bank decides to lower interest rates, it is a sign that the country's economy is not performing to expectations.

There is no denying that Asia is facing increasing headwinds. Incidentally, many Asian economies like China have been racking up debts due to the cheap credit available. 

It is therefore prudent for investors to assess the risk levels in all type of investments.

One investment option is to invest in financially sound companies with consistent dividend payouts and a yield which is superior to the current Fixed Deposit Rate.  

Another option, is to park some amount of money (5% - 10%) of your portfolio into financially sound gold mining companies. These companies have seen their market cap fallen by more than 70% due to the decline in Gold price. In times of crisis, Gold will be in demand and this could potentially result in capital appreciation in these companies.

I use the term financially sound because these companies must have the financial muscle to weather through critical times.

Also set aside cash for future purchases in the event an economic slowdown materialised.   

The above are my own opinion. But please do your own research always.