Here's The Week-Old China Story That Has Some People Freaked Out

Initially, folks were comfortable blaming it on Wednesday's China flash purchasing managers' index report, which unexpectedly signaled that the country's manufacturing sector unexpectedly contracted in January. It was around the time of that release that U.S. futures turned south and began selling in what amounted to a 175 point sell-off in the Dow Jones Industrial Average on Thursday.

However, there was another arguably more worrisome China story, which Stifel Nicolaus' Dave Lutz pointed us to. From WSJ.com today:

Art Cashin, who runs UBS's operations on the floor of the New York Stock Exchange, picked up on this in a mid-afternoon note to clients. "China Beige Book has a sentence that translates into English as 'credit transmission is broken,' " he wrote. "That suggests the current credit squeeze may be far more complicated than Lunar New Year drawdowns."

Indeed, Cashin is followed by many and surely people passed his note around on Thursday. However, that particular headline about the China Beige Book apparently crossed last week.

Nevertheless, it is certainly a major worry.

None of this is a sudden development. Rather it only adds to an increasingly concerning theme. A tightening credit market, which means higher borrowing costs and limited availability of loans, is problematic for a country that relies so heavily on debt-financing.

Indeed, this is the type of thing that would cause reports like the flash PMI to come up short.

"We expect more soft data prints ahead, as the impact of slowing credit growth seeps through to the real economy," said Societe Generale's Wei Yao in response to the disappointing PMI numbers..