David Sterman

With investors fixated on the open-ended crisis in Europe, fretting about how it may affect their investments here in the United States, they may be overlooking another emerging trouble spot.

Halfway around the world, the Chinese economy has begun to slow, and the duration and depth of the current slowdown could have a clear impact on the rest of the world's economies -- and U.S. stocks.

In short, a soft landing would be well-tolerated by the global economy. A hard landing could be devastating. Chinese government officials have begun to take steps to recharge the economy, including a cut in inter-bank lending rates, but they may have less control over this massive ship than they think.

Soft and Getting Softer

Recent data points out of China bring to mind the old adage that "when the United States sneezes, the rest of the world catches a cold." But this time, it's Europe that is making China reach for the Kleenex. European economies have slowed sharply in recent months, with most of them now in recession.

Across the continent, it looks as of the euro zone will contract by 0.6% in the fourth quarter. As Europe accounts for 30% of all of China's exports, making it the country's largest trading partner, it's no surprise Chinese factories are starting to feel a slowdown.

On the surface, China's export sector looks OK. Exports rose 10.9% in November, compared with a year earlier. Yet that's down from 15.9% in October. Exports are growing, but at a rapidly decelerating rate.

David Sterman

David Sterman has worked as an investment analyst for nearly two decades. He is currently an analyst for StreetAuthority.com