Asian stocks fell as China released a bearish manufacturing report Tuesday morning. Added to this bearish news out of China is a spate of negative credit ratings news in Europe (Spanish Bank CAM, Brussels regional government, etc) and a massive downtick in BP shares due to its failure to stem the giant Gulf of Mexico oil leak. These events are weighing on market sentiment and have shares and futures down not only in Asia, but in Europe and the U.S.

I want to concentrate on the Chinese data because of a few comments Nouriel Roubini made about over heating in the BRICs. He said high inflation was a worry and that an asset bubble seems to have formed. In his view, the Chinese government’s attempts to cool the economy could be counterproductive, creating more downside risk for an already sluggish global economic recovery.

To wit, China’s Purchasing Managers’ Index slipped to 53.9 from 55.7 in April on a seasonally-adjusted basis. This was less than the median 54.5 estimate from a Bloomberg News survey of 18 economists. The HSBC manufacturing index also fell to an 11 month low of 52.7 from 55.2. Clearly, China is slowing.

And yields reflect this. Andy Lees of UBS was out with a note yesterday saying:

The 14 day SHIBOR rate jumped by 36bpts today to 3.045%. That is up 120bpts from the start of last week, and is almost flat with 5 year swap rates at 3.09%. According to Bloomberg the 7 day repo shot as high as 4%, reflecting a shortage of cash. “Liquidity is so tight that no one would buy one-year bills in open market operations if the central bank hadn’t raised the yield” according to a local analyst.

The yield curve in China is flattening and that’s a sign of an impending economic slowdown.

Who is going to do the consuming if the Chinese, Brazilians and Indians are putting on the brakes? The US and Europe are over-indebted and cutting back. Unless, the BRICs pick up the slack, global growth in the second half of the year will slow more than is now anticipated. Brazil and India are in “better shape” than China, according to Roubini. Domestic demand in those countries is robust. Let’s hope that is enough to pick up the slack.