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Early Survey Shows Contraction in Chinese Manufacturing Markets Rattled Amid Fears of Slowdown in Asia
(about 1 hour later)
HONG KONG — The Chinese manufacturing sector contracted in May, a poll released on Thursday showed, offering the latest evidence that the Chinese economy is unlikely to pick up steam again anytime soon. HONG KONG — The two biggest economies in Asia showed signs of stress on Thursday, with economic data on China highlighting the fragility of the recovery in that country and a sudden 7.3 percent plunge in the Japanese stock market underlining worries about whether the government’s efforts to reignite growth will bear fruit in the long term.
China’s once-sizzling economy has been slowing for the past couple of years, in part because global export demand has been tepid and in part because the authorities in Beijing have been trying to engineer a more gradual — but more balanced — pace of growth. Stock markets fell across the region, in part because of disappointment over a closely watched purchasing managers’ index from China that offered the latest evidence that the Chinese economy is unlikely to pick up steam again any time soon.
Released by the British bank HSBC, the preliminary purchasing managers’ index slipped from 50.4 points in April to 49.6 points in May, the first time in seven months that it sagged below the level of 50, which separates contraction from expansion. Markets fell across Asia, with the Nikkei 225-share index closing down 7.3 percent. Released by the British bank HSBC and compiled by the research firm Markit, the index slipped from 50.4 points in April to 49.6 points in May, the first time in seven months that it came in below the level of 50, which separates contraction from expansion.
“The cooling manufacturing activities in May reflected slower domestic demand and ongoing external headwinds,” Qu Hongbin, chief China economist at HSBC, said in a note accompanying the data release, adding that a likely slowdown this quarter cast a shadow over China’s fragile recovery.“The cooling manufacturing activities in May reflected slower domestic demand and ongoing external headwinds,” Qu Hongbin, chief China economist at HSBC, said in a note accompanying the data release, adding that a likely slowdown this quarter cast a shadow over China’s fragile recovery.
The pace of the slowdown in the past few months has taken many economists by surprise. Data released last month showing the economy grew by only 7.7 percent in the first quarter of this year, compared with a year earlier, was significantly below expectations for expansion of 8 percent, and prompted numerous analysts to cut their growth forecasts for China. The reading “pretty much dashed” hopes of a recovery in the second quarter, Yao Wei, China economist at Société Générale in Hong Kong, said in a note.
Data for April, too, have been lackluster, and the manufacturing activity index released Thursday, which provided one of the earliest available glimpses into how the month of May is progressing, indicated that conditions are unlikely to pick up during the second quarter. China’s slowing momentum has been long in the making and is, to some extent, deliberately engineered by the authorities in Beijing, who are trying to bring about a more gradual but more balanced pace of growth.
The reading “pretty much dashed” hopes of a recovery in growth in the second quarter, Yao Wei, China economist at Société Générale in Hong Kong, said in a note. Still, any disappointments over the performance of an economy that is a crucial engine of global growth are liable to set off concerns among investors.
The data, compiled by the research firm Markit, helped undermine market sentiment in Asia on Thursday. On Thursday, stock markets reacted to the China data with broad-based sell-offs.
The Hang Seng index in Hong Kong and the Taiex in Taiwan both were down nearly 2 percent by midafternoon. In Singapore, the Straits Times index fell 0.6 percent, and in South Korea, the Kospi dropped 0.9 percent. The Hang Seng index in Hong Kong sagged 2.3 percent by midafternoon, and the Straits Times in Singapore fell 1.9 percent. The key market gauges in Australia and Taiwan both closed down nearly 2 percent, and in mainland China, the Shanghai composite index fell 1.2 percent.
The biggest loser in the region was Japan, where the Nikkei index reversed some of the big rally staged over the past few months on optimism that the economy-bolstering efforts of Prime Minister Shinzo Abe’s government. By far the biggest drop occurred in Japan, where the Nikkei 225-share index fell more than 1,110 points, or 7.3 percent, in the space of a few hours, giving up some of the large gains staged over the past six months.
Market watchers said the drop appeared to be more linked to domestic factors than to the disappointing China data.
“An element of profit-taking is not surprising in a market that has risen sharply,” said Stephen Davies, chief executive of Javelin Wealth Management in Singapore, though he added that the speed of the drop, “telescoped into an afternoon,” was remarkable.
The Nikkei 225 has soared 39 percent this year, after Shinzo Abe, who took over as prime minister in December, vowed to pursue aggressive steps to combat persistent deflation and lift the economy out of years of feeble growth.
These steps have included a pledge by the Japanese central bank to effectively flood the economy with cheap money through purchases of government bonds, commercial debt and other assets.
But taking many market observers by surprise, bond yields have risen in recent days, fanning worries about a rising interest rate burden for the government. Japan is vulnerable to rising borrowing costs because of its high public debt, which is twice the size of its economy.
Bonds are also the main financial assets held by banks, pension funds and insurance companies, making a surge in debt yields perilous.
Bank stocks were among the worst hit in the stock market sell-off.
The yield on the 10-year Japanese government bond briefly spiked above 1 percent Thursday before dropping back to 0.9 percent, but the move nevertheless spooked investors, helping produce the fall in the stock markets, said Mr. Davies of Javelin Wealth Management.
“Given the indebtedness of the Japanese government, there are worries about the impact that this could have if sustained,” Mr. Davies said. “It is too early to say whether it will be sustained, so we should not read too much into one day’s extreme move in the markets.”