China Manufacturing Gauge Hits Two-Year Low

Aug 03, 2015

Caixin China manufacturing purchasing managers index fell to 47.8 in July from 49.4 in June

China got another dose of bad news about its already-weak manufacturing sector on Monday, as a final measure of factory activity in July slumped to a two-year low.

The Caixin China manufacturing purchasing managers index, a gauge of nationwide manufacturing activity, fell to 47.8 in July from 49.4 in June, Caixin Media Co. and research firm Markit said. A reading below 50 shows contraction from the previous month, while one above 50 signals expansion. This Caixin reading was much worse than an official measure of Chinese manufacturing activity, released Saturday, which came in at 50.0 for July, down from 50.2 in June.

Analysts said that the steep slide in the country’s stock market in late June and July probably had an impact on sentiment, adding to pressure from an already-weak property market and sluggish domestic and overseas demand. They added that the additional signals of manufacturing weakness could prompt the government to redouble efforts to boost the economy with more spending and relaxed monetary-policy measures.

“The stock-market volatility may have dampened business confidence,” said Wendy Chen, an economist at Nomura. “This might have contributed to weak demand.”

“July data signaled that the downturn in China’s manufacturing sector intensified at the start of the third quarter,” said Caixin in a statement accompanying the data. “Renewed falls in both total new work and new export orders led manufacturers to cut production at the fastest rate since November 2011.”

A steep selloff in the country’s stock market began in June and continued into July despite an aggressive government rescue program. Share prices in Shanghai were down 14% in July, the worst monthly performance since August 2009, according to its benchmark index. Shares were down nearly 1% early on Monday.

The economy posted year-over-year growth of 7% in the second quarter, better than expected but still the slowest pace in six years.

The key manufacturing sector has been a major factor in the economy’s less-than-stellar performance, reflecting overcapacity in traditional heavy industry such as steel and cement as well as weak demand for exports of the country’s light-industrial products.

Analysts said that Beijing could step up spending on infrastructure and let banks lend out more of their deposits by cutting the reserve requirement ratio.

“Fiscal policy needs to be more proactive,” said Liu Li-Gang, economist at ANZ. He added that China’s central bank “could also make another cut in the bank reserve requirement ratio this month and another interest rate cut sometime in the third quarter.”

The final Caixin PMI reading was even lower that the preliminary—or “flash”—result, which came in at 48.2 when it was released late last month. That reading was a 15-month low. The initial figure is based on 85% to 90% of responses to the sentiment survey.

Source: wsj.com