Stock markets slipped from Japan to Australia yesterday as evidence of weakening manufacturing activity in China rocked confidence about the strength of the rebound in the world's second-biggest economy.
The deteriorating outlook on the mainland sent Japan's Nikkei 225 stock average slumping 7.3 per cent, registering the deepest loss since the 2011 earthquake and tsunami. The Hang Seng Index dropped 2.54 per cent to 22,669.68, its biggest slide in seven weeks. The Shanghai Composite Index fell 1.16 per cent while Australia's S&P/ASX 200 Index dropped 1.99 per cent.
Deepening doubts about China's economic prospects added to market jitters after Ben Bernanke, chairman of the US Federal Reserve, indicated on Wednesday that the United States might begin winding back stimulus measures by reducing the pace of bond purchases in the autumn.
The HSBC flash purchasing managers index for China fell below the 50 - the line which separates expanding from contracting activity - in May for the first time in seven months, slipping to 49.6 from 50.4 in April. Output still climbed, but at a slower rate, while new export orders dropped. Employment also worsened, the survey conducted by HSBC and UK-based data provider, Markit, showed.
Yesterday's slide took the shine off regional stock markets that benefited from Japan's efforts to stimulate its economy and an improving US economy. The MSCI Asia Pacific Index declined 3.7 per cent to 138.16 as of 3.57pm in Tokyo. The measure had surged 11 per cent this year.
The rise in the value of the Nikkei 225 has been more pronounced. It has rallied 41.5 per cent since Shinzo Abe took office in December, promising to revive the economy. Investors seeking to lock in that gain helps explain why the Nikkei fell so sharply versus other regional markets.
Stocks were only slightly lower at midday on Wall Street, but European stocks dropped the most in 10 months. London's FTSE 100 index of leading shares fell 2.10 percent to 6,696.79 points and in Frankfurt the DAX 30 index slumped 2.10 percent to 8,351.98 points.
"A slowdown is likely in the middle [of the second quarter], casting downside risk to China's fragile growth recovery," said Qu Hongbin, chief China economist at HSBC.
Signs of a faltering job market may alert China's new national leaders to potential social unrest.
President Xi Jinping , met hundreds of soon-to-be university graduates at a job fair in Tianjin on May 14, which was viewed by analysts as a sign of the leadership's concern about weakness in the labour market.