Forget Greece. I consider the health of the Chinese economy to be the biggest story of 2012. If it has a hard landing, it will bring down the rest of the global economy with it.

So where do things stand?

Over the weekend, while most were home with a three day holiday in the U.S., China cut its bank reserve ratio requirement by 50 points to 20.5% from 21%. The reserve ratio is the proportion of cash that banks have to set aside on “reserve”. But the more they have to set aside, the less they can lend.

By all media accounts, lending had slowed to a trickle so the cut was expected. In fact, many had predicted the cut weeks ago, possibly ahead of the Lunar New Year holiday in January. It is the second cut in the last 3 months.

This cut in the reserve ratio is expected to free up about $63 billion into the Chinese economy. It’s a stimulus, especially to the beleaguered housing sector. While the Chinese government has been trying to deflate the growing real estate bubble, it might be doing too good of a job. None of the 70 major cities saw price increases year over year in January and some cities saw serious monthly price decreases.

Exports Slowing

Today, we got even more data regarding the state of the Chinese economy. HSBC released its preliminary PMI for February. It rose to 49.7 from 48.8 in January. And while it still showed contraction, as it was under 50, it was the highest in 4 months.

However, the European slowdown appears to be biting the Chinese economy. Europe is one of its larger trading partners. Export orders dropped to 47.4 from 50.4 in January, the largest drop in 8 months.

Yes, there was an earlier than normal Lunar New Year holiday, which essentially shut down the country for over a week, but historically, productivity picks-up sharply after the holiday is over. The data is suggesting that didn’t happen.

HSBC is a private survey of just over 400 smaller companies. The government’s own PMI survey tracks larger companies and has been more bullish than HSBC’s. That won’t be out for another 2 weeks.

But given the cut to the reserve ratio over the weekend, ahead of some of this data which is still showing weakness, it leaves me wondering:

What does the Chinese government know that we don’t?

And should the rest of us be worried?

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