China's factory output slumps to crisis level

A dearth of new business has caused factory output in China to shrink for the fourth consecutive month to a low not seen since November 2011. As sales sag, factories are cutting staff at a faster pace to rein in costs, depressing employment to levels
A dearth of new business has caused factory output in China to shrink for the fourth consecutive month to a low not seen since November 2011. As sales sag, factories are cutting staff at a faster pace to rein in costs, depressing employment to levels not seen since the global financial crisis in 2009.PHOTO: AGENCE FRANCE-PRESSE

Flash Purchasing Managers' Index sinks to lowest level since March 2009

BEIJING • Activity in China's factory sector shrank at its fastest pace in more than six years this month as domestic and export demand dwindled, a private survey showed, adding to fears that the world's second-largest economy may be slowing sharply.

China's surprise devaluation of the yuan last week and the nearcollapse in its stock markets in early summer have sparked fears that it could be at risk of a hard landing, which would hammer global growth, sending financial markets into a tailspin.

The preliminary Caixin/Markit China Manufacturing Purchasing Managers' Index (PMI) stood at 47.1 in August, well below a Reuters poll median of 47.7 and down from July's final 47.8.

The figure was the worst since March 2009, during the depths of the global financial crisis, and the sixth straight reading below the 50-point level, which separates growth in activity from contraction on a monthly basis.

The flash PMI, the earliest economic measure to be released about China each month, is closely followed by global investors for clues on the health of the economy.

"The poor number confirms what higher-frequency data has been suggesting - that more weakness in the economy is likely," said economist Chester Liaw at Forecast in Singapore. "The authorities claimed that there will be a rebound in demand in the second half, but it appears that the opposite is happening.

"With first-half year GDP scraping the bottom of the barrel at 7 per cent, the authorities will have a fight on their hands to ensure that second half year GDP comes in at even the same level."

A detailed breakdown of the activity survey showed conditions were deteriorating on almost every level, with factory output sinking to a near four-year low, domestic and export orders declining at a faster rate than in July and companies laying off more workers.

US stock futures fell sharply after the PMI report and most Asian stock markets and the Australian dollar extended early losses.

Overnight on Wall Street, the S&P 500 sank to a more-than- six-month low on concerns about how China's slowdown would impact on US firms' earnings and global growth.

The Chinese authorities have struggled to stabilise the country's stock markets after a near-collapse in early summer, and stunned financial markets this month by devaluing the yuan by nearly 2 per cent.

The central bank said the yuan move was a technical one and part of a reform process, but many investors fear that the currency will be allowed to depreciate further amid political pressure to shore up flagging exports, risking a global currency war.

The gloomy PMI figure followed other official data last week that showed growth in China's factory output, investment and retail sales were all weaker than expected in July, dashing hopes that the economy was finally stabilising after a flurry of support measures over the past year, including four interest rate cuts and a massive stock market rescue.

Analysts have warned that China will struggle to meet its official economic growth target of 7 per cent this year if it does not ratchet up policy support to combat cooling activity. Some economists believe that current growth levels are already close to half that figure.

New orders - a proxy for local and foreign demand - slumped to a three-year low, while new export orders shrank to their worst level since June 2013.

A dearth of new business caused factory output to shrink for the fourth consecutive month to hit a trough of 46.6, a level not seen since November 2011 and down from July's 47.1.

As sales sag, the survey showed, factories are cutting staff at a faster pace to rein in costs, depressing employment to a level not seen since the global financial crisis.

The latest PMI will reinforce bets that China must increase government spending, cut interest rates again and relax banks' reserve requirements to get the economy back on an even keel.

To make matters worse, Chinese financial markets have suffered unprecedented turbulence lately, further denting investor and consumer confidence.

Chinese shares tanked by as much as a third during a sell-off last month. That shakeout also raised fears of tighter credit supply for companies as state-controlled banks shifted their funding priorities to support the stock market instead. REUTERS

A version of this article appeared in the print edition of The Straits Times on August 22, 2015, with the headline 'China's factory output slumps to crisis level'. Print Edition | Subscribe