Activity in China’s factory sector shrank at its fastest rate in at least three years in August as domestic and export orders tumbled, increasing investors’ fears that the world’s second-largest economy may be lurching toward a hard landing.
Even more worrying, China’s services sector, which has been one of the lone bright spots in the sputtering economy, also showed signs of cooling, a similar business survey said.
Hurt by soft demand, overcapacity, and falling investment, the economy has also been buffeted by plunging shares and a shock yuan devaluation, in what some have called a “perfect storm” of factors that is rattling global markets and could strain relations with China’s major trading partners.
Japanese finance minister Taro Aso said yesterday it would be beneficial for this week’s meeting of the G20 major economies to discuss what is going on in China’s economy.
“Capital market turmoil has made Chinese businesses and consumers turn more cautious,” Bill Adams, a senior economist at PNC Financial Services in Pittsburgh, said in reference to a 40% plunge in Chinese shares since mid-June.
Mr Adams said China’s economy could grow around 6.5% in the second-half of the year, easing to 6.2% in 2016. Some analysts believe growth levels are already well below that, putting Beijing’s official target of 7%.
News of deteriorating business conditions set off fresh selling in Chinese shares, with the blue-chip CSI300 index tumbling 4% at one point.
Analysts said the bleak readings affirmed bets that China, which has slashed interest rates five times since November, must loosen policy again soon to avert a sharper economic downturn that could weigh on global growth even as the US central bank prepares to raise interest rates.
China’s official manufacturing Purchasing Managers’ Index fell to 49.7 in August from 50.0 in July, the National Bureau of Statistics said yesterday.
That was the lowest since August 2012, and below the 50-point mark separating growth from contraction.
New orders — a proxy for domestic and foreign demand — fell to 49.7 in August from July’s 49.9. New export orders contracted for an 11th straight month.
A private survey by Caixin/Markit focussing on smaller factories pointed to an even sharper cooldown, with the PMI dropping to 47.3, the worst reading since March 2009. Both surveys showed manufacturers were laying off workers at a faster rate as their order books shrank.
The closure of factories in northern China to clear Beijing’s skies for a huge military parade this week likely also hurt output, as did a giant blast in the port city of Tianjin.
China’s services companies are also showing signs of fatigue, to the point where growth may no longer be enough to offset persistent factory weakness.
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