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China’s factory sector shrink deepens global growth worries

Chinese economyWorries of a deepening China economic slowdown intensified on Friday after a private survey showed the factory sector shrank at its fastest rate in almost six and a half years in August, hammering global stocks and commodity prices.

The gloomy figure sent investors fleeing for cover in gold and bonds, fearing China’s sagging economy would translate into slower global growth and muddy the outlook for the timing of the first U.S. interest rate hike in nearly a decade.

World markets had already been on edge after China’s surprise devaluation of the yuan last week and a near-collapse in its stock markets in early summer.

“Uncertainty about China growth is now the main swing factor in markets,” said Tim Condon, an economist at ING Group in Singapore. “Today’s data reinforced the doubts about global growth.”

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.

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

The downdraft from China is rattling economies of its trade-reliant Asian neighbours and prompting many Western companies to reduce investments and look for ways to cut costs.

A detailed breakdown of China’s PMI survey showed conditions deteriorating on almost every level in August. Factory output sank to a near four-year low as firms laid off more workers, while domestic and export orders fell at a faster rate than in July.

Following three decades of blistering double-digit economic growth, Chinese authorities have had limited success in shoring up activity this year despite four interest rates cuts since November.

Worse, last week’s shock 2% devaluation in the yuan and a near-collapse in Chinese shares over the summer that was countered by a massive stock market rescue do not appear to have calmed investor jitters.

The yuan has slid nearly 3% since its August 11 devaluation, a fall that some analysts say is too modest to boost Chinese exports, but notable enough to raise fears of competitive currency devaluations between governments.

The speed at which China’s economy is losing steam has led some analysts to warn that the government may struggle to meet its official economic growth target of 7% this year if it doesn’t ratchet up policy support. Growth in China’s factory output, retail sales and investment all disappointed in July.

Some economists believe that China’s present growth levels could already be closer to half of the 7% official figure reported for the second quarter.


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