A key gauge of Chinese manufacturing activity tumbled to a 15-month low this month, an independent survey showed, throwing a pall over growth in the world’s second-largest economy.
The preliminary reading of Caixin’s Purchasing Managers’ Index (PMI) came in at 48.2 this month, the Chinese media group said in a joint statement with Markit, a financial information services provider that compiled the survey.
The figure was the weakest reading since 48.1 in April last year, according to Markit’s data. A figure above 50 signals growth, while anything below indicates contraction.
This month’s flash PMI was worse than the market expected, Beijing-based BNP Paribas economist Chen Xingdong (陳興動) said.
China’s industrial economy has had a hard landing or is in industrial recession in my opinion,” he said.
Industrial output grew just 6.8 percent year-on-year last month, while the producer price index — a measure of costs for goods at the factory gate — declined 4.8 percent, official figures showed.
“The core reason is effective demand remains weak,” Chen said, adding that China had become a less competitive exporter than many other developing countries while domestic consumption had barely improved.
Third-quarter growth was “under enormous pressure,” he said. “Although I don’t think it will decelerate further, the recovery momentum is extremely feeble.”
The Chinese economy expanded 7.4 percent last year, the weakest pace since 1990, and slowed further to 7 percent in each of the first two quarters this year.
Nomura economists linked the lower PMI reading to dampened short-term sentiment following China’s recent stock market rout, which saw the Shanghai Composite Index slump more than 30 percent in less than four weeks before stabilizing earlier this month.
“As the equity markets have stabilized, we expect growth momentum to strengthen in coming months,” they said in a report.
Shanghai stocks sank 1.29 percent yesterday after a six-day rally. The Shanghai Composite Index fell 53.01 points to 4,070.91. However, it gained 2.87 percent for the week.
Meanwhile, the State Council yesterday said that China would allow the yuan to trade in a wider range against the US dollar. Flexibility will be increased, the Cabinet said in a statement, without giving a timing or scope for the potential adjustment.
The exchange rate is to be kept at a basically stable level, the State Council said. The yuan traded in Hong Kong fell the most in almost three weeks yesterday, and its one-month implied volatility surged to the highest since July 14.
The trading band was last expanded in March last year from 1 percent, and before that doubled from 0.5 percent in April 2012. It was 0.3 percent before an adjustment in May 2007.
While a wider trading range would allow market forces a bigger role, it could provide room for depreciation and help exports.
“The State Council is implying that the People’s Bank of China [PBOC] should widen the trading band,” said Andy Ji, a Singapore-based strategist at the Commonwealth Bank of Australia. “The authorities may allow the yuan to weaken to boost China’s exports, if the PBOC reduces its intervention in the existing band.”
The PBOC could raise the limit within a month, said Zhu Haibin (朱海斌), Hong Kong-based chief China economist at JPMorgan Chase & Co.
It is rare for the State Council to mention the yuan’s trading range, and the PBOC is likely to widen the band to 3 percent, he added.
The IMF’s mission to China said in a statement in May that, although the yuan is no longer undervalued, it needs to be more flexible. China should limit intervention to avoid disorderly market conditions or excessive volatility, the mission said.
China will improve the exchange rate’s mechanism and expand the scale of yuan trade settlement, the State Council said yesterday. The country will study the starting of more hedging tools for companies to deal with currency risks.
Additional reporting by Bloomberg
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