China factory PMI hits unexpected low

Flagging demand dragged China’s giant factory sector into its sharpest contraction in six-and-a-half years in September, a private survey showed yesterday, triggering a flight to safety in Asian markets that analysts say could extend across the globe.

The bleak data came after the US central bank refrained from lifting interest rates for the first time in nearly a decade last week, citing concerns that global problems, and China’s slowing economy in particular, may hurt the US recovery.

The preliminary Caixin/Markit China Manufacturing Purchasing Managers’ Index fell to 47 in September, the worst since March 2009, missing market expectations for 47.5 and slipping from August’s final 47.3. Levels below 50 signify a contraction.

It was the seventh consecutive that China’s manufacturing sector had shrunk, and the survey showed business conditions deteriorating almost across the board, as firms slashed output, prices and jobs at a faster pace as orders fell.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell as much as 2.5% at one point yesterday in its biggest daily fall since August 24, as investors sought refuge in US Treasuries.

Global investors and policymakers have been on edge over the health of China’s economy this year, as it looked set to log its weakest performance in at least a quarter of a century.

A plunge in China’s stockmarket over the summer and a surprise devaluation in the yuan have roiled global markets, and raised doubts inside and outside China over Beijing’s ability to manage the world’s second-largest economy.

There are signs that China’s stumbling economy have unnerved companies, financial markets and consumers around the world.

Sentiment at Asia’s top companies soured in the third quarter to a near four-year low as some executives ranked the Chinese market as their top risk, a Thomson Reuters/ Insead Asian Business Sentiment Index showed yesterday.

And despite China having slashed interest rates five times since November, small- and mid-sized Chinese firms are still starved for funds due to banks’ preferences to lend to big, state-owned companies.

Accounting for up to 80% of urban employment and 60% of China’s GDP, the woes of small Chinese companies could be harbinger of the hard times ahead.

Euler Hermes, a seller of trade insurance, predicted this week that corporate bankruptcy in China could surge 50% in the next two years to nearly 4,000 cases.

“The multi-year low in the PMI confirms the economy will face strong headwinds before finding a new steady state,” economists at Barclays said in a note yesterday.