Following an unprecedented boom in building and pre-Olympic preparations in general, the Chinese economy appears to be slowing down. This observation is based on the recent significant retreat in two key indicators of Chinese economic activity, the Baltic Dry Index and the China Manufacturing PMI.

The Baltic Dry Index (BDI) — an index managed by the Baltic Exchange in London which measures the price of shipping major raw materials by sea — has dropped from a record high of 11,689 in May to 6,691 at the beginning of September. Since the overwhelming majority of the bulk raw materials shipped by sea are bound for China’s manufacturing and construction sectors, this index is a good measure of the country’s industrial pulse. It is worth noting that, despite this sharp drop, the BDI is well above its January 2006 value of 4,600.

The other indicator of weakening activity in China is the latest CLSA China Manufacturing PMI. In August it fell by 7.7%, the largest monthly decline since the index was developed in early 2004. According to CLSA, restrictions on transportation and power consumption contributed to a decline in manufacturing production and caused firms to place fewer new orders for manufactured goods. Also, in some cases, firms in Beijing were required to halt production completely during the Games in order to reduce airborne smog.

Slowing domestic production in China, together with the slowing world economy, caused the CLSA input price index to tumble from a record high of 86.1 in July to 61.5 in August, a thirteen month low. As the chart below illustrates, this softening in demand for commodities is reflected by the recent weakening in the Baltic Dry Index.

While the Olympics clearly had a significant one-time negative impact on manufacturing in August, the underlying pace of overall activity in China was already softening prior to the games. Given the persistent weakening of export demand due to weaker U.S. spending, this moderation in growth is likely to extend into 2009.

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