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Markets Rattled Amid Fears of Slowdown in Asia Markets Rattled Amid Fears of Slowdown in Asia
(about 3 hours later)
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. HONG KONG — The two biggest economies in Asia showed signs of stress on Thursday, with a 7.3 percent plunge in the Japanese stock market and a surprise contraction in the manufacturing sector in China casting a shadow over the global economy.
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. The data on China highlighted the fragility of a giant economy that has been an engine of global growth, while the fall in Japanese stocks underlined worries about whether the government’s efforts to reignite growth will bear fruit long-term. The stock retreat spread around the world, European markets down around 2 percent and Wall Street futures indicating a 1 percent drop at the opening.
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 double dose of bad news unsettled investors and highlighted that Asia – for all the promise that its fast-growing economies hold – may not be able to offset the debt and unemployment problems that beset the United States and Europe.
“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. In China, the latest sign of flagging momentum came in the form of a closely watched manufacturing purchasing managers’ index. 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 expansion from contraction. 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.
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. 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. Still, disappointments over the performance of China’s economy – the second-largest in the world after that of the United States – remain liable to unsettle markets not just in Asia but around the globe.
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. On Thursday, the Hang Seng index in Hong Kong sagged 2.5 percent, and the Straits Times in Singapore fell 1.8 percent. The markets in Australia and Taiwan both fell nearly 2 percent, and in mainland China, the Shanghai composite index dropped 1.2 percent.
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. Stock markets in Europe also fell sharply. The DAX index in Germany and the CAC 40 in France were down 2.7 percent and 2.4 percent, respectively, by early afternoon. In London, the FTSE fell 2 percent. U.S. stocks also appeared poised for a fall, with futures on the Standard & Poor’s 500-share index down 1.2 percent.
On Thursday, stock markets reacted to the China data with broad-based sell-offs. By far the biggest drop occurred in Japan, where the Nikkei 225-share index fell more than 1,140 points, or 7.3 percent, in the space of a few hours. Market watchers said the drop appeared to have been set off by a combination of factors, among them nervousness about the dizzying speed with which the market had risen in previous months.
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. High hopes that the bold economic policies of Prime Minister Shinzo Abe of Japan will succeed have prompted a huge rally in stocks since November, and even after its drop on Thursday, the Nikkei was up nearly 40 percent since the start of the year.
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. “The stock market’s rise has so far been largely driven by expectations of an economic turnaround, but we’ve yet to see Mr. Abe’s policies really gain traction,” said Kiyoshi Yoshimoto, chief senior economist at the Japan Research Institute in Tokyo. “That means even small shocks, like lower-than-expected numbers out of China or some volatility in bond markets, can trigger a big but temporary response,” he added.
Market watchers said the drop appeared to be more linked to domestic factors than to the disappointing China data. Stephen Corry, chief investment strategist at LGT in Hong Kong, agreed that a combination of negative news helped spur the sell-off, among them the disappointing data from China and signs that the U.S. Federal Reserve may begin to scale back its stimulus efforts. But the Japanese market had rallied more than 14 percent this month alone, he added, and “was probably due a breather.”
“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. Akira Amari, Japan’s economy minister, sought to calm nerves after the market closed Thursday. “The Japanese economy is staging a sound recovery, and there is no need for panic,” he said, according to the Nikkei business daily. The plunge “is not exceedingly large, and stock prices in China, where the shock originated, have not fallen so much either,” he added.
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. Analysts have broadly welcomed Mr. Abe’s efforts to breathe life into a listless Japanese economy through a three-pronged approach of major fiscal spending, a promise to pursue structural reforms and a monetary policy that has effectively flooded the economy with cheap money through purchases of government bonds, commercial debt and other assets.
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. One result has been a weakening of the yen, whose 17 percent drop against the dollar since the start of this year has helped lift the earnings prospects of many Japanese exporters. Data released in the past few weeks have shown that the economy has begun to pick up speed.
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. Taking many market observers by surprise, however, bond yields have risen in recent days, fanning worries about rising interest rate burden for the government. 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 Stephen Davies, chief executive of Javelin Wealth Management in Singapore.
Bonds are also the main financial assets held by banks, pension funds and insurance companies, making a surge in debt yields perilous. 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. “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.”
Bank stocks were among the worst hit in the stock market sell-off. Mr. Yoshimoto of the Japan Research Institute also said the dramatic market moves Thursday had not changed the overall, longer-term picture for recovery in Japan. That could change if Mr. Abe fails to follow through on his promises for economic reforms, he said, “but for now, there’s no need to become overly pessimistic about Japanese shares.”
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.

Hiroko Tabuchi contributed reporting from Tokyo.

“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.”