Why It Matters

China's PMI piles on gloom

The hits just keep on coming.

China reported on Wednesday that its Purchasing Managers' Index (PMI), an indicator of manufacturing activity and a key measure of economic health, fell to a six-year low this month.

This caps a run of soft economic data out of the world's second-largest economy, including weak exports and a wobbly housing sector.

In short, China's economy is heading for its weakest performance in 25 years, and the recent slew of poor data indicates it might not even meet its 7 per cent growth target for this year.

Unsurprisingly, the PMI announcement drove regional markets lower on Wednesday.

Still, Bank of Singapore chief economist Richard Jerram noted that the structural difficulties facing China are not new and have been accumulating for several years. "The issue seems to be that confidence in the ability of policymakers to address the problems has diminished," he said. "This is the key issue because countries that have experienced similar periods of excess investment and credit growth have generally seen extremely painful adjustments."

China's weakening economy spells bad news for Singapore, a key trading partner, as well. Singapore, too, has had its own run of disappointing news, with economists warning that the threat of a technical recession - two quarters of declining growth - looms.

Another concern among investors is the fact that the US Federal Reserve is closely watching developments in China as it decides when to raise interest rates. Some analysts had expected the Fed to hike rates last week, but it stayed its hand, citing China's troubles as a reason why it did not want to further rock the global economic boat. Ironically, the uncertainty over when the Fed might make its move has been rocking financial markets.

If China's economy continues to show further signs of slowing, the guessing game over the timing of the rate hike will only continue - and so will the market volatility.

A version of this article appeared in the print edition of The Straits Times on September 26, 2015, with the headline 'China's PMI piles on gloom'. Print Edition | Subscribe