The index increased from 47.2 in September to 48.3 in October, indicating that the country’s output has declined at a slower pace. This shows that the recent fiscal stimulus and monetary stimulus have created a positive impact on factory activity. China’s central bank has lowered interest rates six times in the last year, and the government has increased expenditure in infrastructure and encouraged home purchases in a bid to shore up the economy. Chinese small and medium sized factories have been running at overcapacity and forced to cut production amid weak global aggregate demand.
Ha Fen, chief economist at Caixin Insight Group, said, “The slight upswing shows the manufacturing industry’s overall weakening has slowed down, indicating that previous stimulating measures have begun to take effect.” Ha Fen added, “Weak aggregate demand remained the biggest obstacle to economic growth, and the risk of deflationInvestopedia – resulting from the continued fall in the prices of bulk commodities needs attention.”
Although there has been an an improvement in Caixin’s manufacturing activity gauge, the government-run factory activity gauge (released over the weekend) suggests that the output of companies has been weaker than expected. According to the Chinese government, the official manufacturing PMI has remained at 49.8 as compared to a month earlier, indicating that the economy is still contracting. Zhang Fan, an economist with RHB Group, said, “Though the Caixin PMI came in better-than-expected, it doesn’t mean China’s small manufacturers are now out of woods.”
Asian Stock Markets Declined
Immediately after the release of Caixin’s factory activity data, market participants became pessimistic about China’s economic recovery and their ability to meet the annual GDP growth rate target of 7%. The Shanghai Composite Index, a measure of China’s stock market, declined by about 2% (at the time of writing). Other Asian stock markets showed high correlation with China’s stock markets. Japan’s Nikkei Stock Average stumbled by 2.10%, Australia’s S&P/ASX was in red by 1.3% and Hong Kong’s Hang Seng Index was down by 1.17%.
China’s central Bank immediately raised the onshore yuan exchange rate by 0.5% to 6.3154 per-dollar, which marks the highest increase in almost 10 years.
The Bottom Line
Weak manufacturing output has fuelled immense pessimism among market participants that China’s government will be able to meet its 2015 GDP growth rate target of 7%. Evan Lucas, market analyst at brokerage IG, said, “There’s some fairly big pessimism that the economy will continue slowing in the further quarter.”