China’s manufacturing PMI shrinks for 10th month

January 4, 2016 12:56 PM (UTC+8)

 

In case you weren’t listening, that hissing sound you hear in global stock prices Monday is traceable to disappointing economic data from China that led to a 7% deflation in Chinese shares overnight.

Chinese circuit board factory
Chinese circuit board factory

China’s manufacturing sector shrank for the 10th straight month in December, according to the Caixin China Purchasing Managers’ Index

In December, operating conditions for the sector came in at 48.2, a significant deterioration from November’s PMI of 48.6.

When the PMI falls below the neutral 50-point level, it means a sector is contracting, the further away, the worse it is.

The December number shows that “the forces driving an economic recovery have encountered obstacles and the economy is facing a greater risk of weakening,” said Dr. He Fan, chief economist of Caixin Insight Group in a statement. “More fluctuations in global markets are expected now that the US Federal Reserve has started raising interest rates.

“The government needs to pay more attention to external risk factors in the short term and fine-tune macroeconomic policies accordingly so the economy does not fall off a cliff,” he added.

Caixin reported that the index fell mainly because of a renewed shrinking of manufacturing output. December was the seventh month out of eight in which production fell.  Softer demand at home and abroad lead to a further weakening of new businesses. New export orders fell for the first time in three months.

Lower production requirements caused manufacturers to shed more workers and cut purchasing activities. The downward move in both input costs and sales prices increased deflationary pressures.

The weakness of the data shocked traders and the stock market plunged on the first trading day of the year. The Shanghai Stock Exchange Composite Index tumbled 243 points, or 6.9% to 3,296. And the CSI300 Index, which tracks the 300 largest A-shares on the mainland market, sank 262 points, or 7%, to 3,469. The 7% drop triggered a “circuit-breaker” that suspended equities trade nation-wide for the first time. It was the index’s worst single-day performance since the depth of a summer stock market rout in late August.

The economy “needs to simultaneously push forward the supply-side reform to release its potential and reap the benefits,” He said.

The Caixin China PMI for the services sector will be published January 6.

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