Contracting Chinese composite PMI sparks stock sell-off
Latest data confirm China's efforts to prop up the economy are not working despite the People's Bank of China announcing a series of rate cuts
Stocks across the world tumbled on Tuesday as renewed evidence of weakness in the Chinese economy surfaced. China’s manufacturing Purchasing Managers’ Index (PMI) has been contracting for several months now. But even the services sector is now decelerating, indicating there is a broad-based slowdown in Asia’s largest economy. China’s services PMI came in at 51.5 for August, well below July’s 53.8. The upshot: the Caixin Composite Output Index, a measure of private sector activity in both services and manufacturing, fell to 48.8 in August. Any reading below 50 signifies contraction from the previous month.
The data further confirms that the Chinese government’s efforts to prop up the economy are not working despite the People’s Bank of China announcing a series of rate cuts since last November. On Friday, Moody’s Investors Service cut China’s growth projection to 6.3% for 2016, down from 6.5%, citing that recently published economic indicators show that the slowdown in exports and investment has continued into the September quarter as well.
The deepening slowdown in China is beginning to darken the growth outlook for other economies which rely on exports to China and are predominantly commodity producers. Gross domestic product growth for emerging market economies is likely to fall further to 4.1% in 2015, down from 4.8% in 2014, said Morgan Stanley, citing the sharp slowdown in China. A sharp Chinese slowdown is going to hurt two large emerging market commodity exporters—Brazil and Russia. Countries as far apart as Brazil, Chile, Germany and Australia will all be hurt by a Chinese slowdown. It’s little wonder therefore that jitters about China reverberate through global stock markets.
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