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https://scmp.com/news/china/economy/article/1860786/chinese-factory-gauge-drops-lowest-level-march-2009
China

Chinese factory gauge drops to lowest level since March, 2009

Activity in China's factory sector unexpectedly shrank to a 6-1/2 year low in September, a private survey showed, raising fears of a sharper slowdown in the world's second-largest economy. Photo: Reuters

A private Chinese manufacturing gauge has fallen to the lowest in 61/2 years, underscoring challenges facing the economy as its old growth engines splutter.

A global sell off in riskier assets gained pace after the preliminary Purchasing Managers’ Index from Caixin Media and Markit Economics dropped to 47.0 in September.

That missed the median estimate of 47.5 in a Bloomberg survey and fell from the final reading of 47.3 in the previous month. Readings remained below 50 since March, indicating contraction.

Premier Li Keqiang’s expansion target of about 7 per cent for this year is being challenged by a slowdown in manufacturing and exports even as services and consumption show resilience.

President Xi Jinping downplayed concern about weakening growth in a speech in Seattle to mark the start of his US trip.

The soft PMI “mainly reflected weak external demand,” said Julia Wang, a Hong Kong-based economist with HSBC Holdings. “As China has rolled out a slew of pro-growth measures in the past months, China’s domestic demand may have stabilised.”

The Shanghai Composite Index was 2.2 per cent lower at 12:56pm local time and the Hang Seng index dropped 4.3 per cent in Hong Kong.

The offshore yuan and the Australian dollar both weakened. Futures on shares in the US and Japan, where markets were closed on Wednesday, also tumbled.

Wang said she expected more policy support and forecasts another 150 basis points cut in banks’ required reserve ratio.

She said the Caixin PMI covered firms with more exposure to exports, and indicators in coming months may show that the economy is not as bad as the flash PMI indicates.

Readings of output, new orders and employment all declined at a faster rate, according to the survey.

“The new leg down in the manufacturing PMI redoubles pressure on the government to allow market forces to guide the yuan weaker against the dollar before year-end,” William Adams, senior international economist at PNC Financial Services Group, wrote in an e-mail.

Reflecting the slowdown in China’s old-growth drivers, fixed-asset investment rose at the slowest pace in 15 years in the first eight months of 2015 and industrial production trailed analyst estimates last month.

Factory shutdowns in Beijing and surrounding provinces ahead of the September 3 military parade in Beijing may also have weighed on the manufacturing sector.

For Federal Reserve Chair Janet Yellen, who cited concern over China’s outlook when explaining her decision not to raise interest rates at this month’s policy meeting, more weak numbers could strengthen the case for prudence, Bloomberg economist Tom Orlik wrote in a note.

“The Caixin data doesn’t fundamentally change the narrative, but more weak numbers between now and the Fed’s next meeting at the end of October would obviously add to the case for caution,” Orlik wrote.

China’s official factory gauge fell to the lowest reading in three years in August. A measure of services fared better, as the economy’s new growth drivers help cushion the growth outlook.

Alternative indicators, such as data culled from China’s most-used search engine, biggest online outlet and main bank-card network, signal a stabilisation in the nation’s economy.

Still, Nomura Holdings economists say there’s downside risk to their gross domestic product growth estimate of 6.9 per cent in the third quarter.

“We continue to expect accommodative monetary policy,” with one more 50 basis point cut of banks’ reserve requirement ratio in the fourth quarter, economists led by Hong Kong-based Yang Zhao wrote. “We maintain our call for fiscal policy to play a larger role in bolstering growth.”