Fears continue to rise over the state of the world’s second largest economy after China posted disappointing PMI data, falling to a nine-month low in August.
The country’s poor manufacturing output figures have raised the risk that outgoing premier Wen Jiabao will miss his growth target for the first time since he took office in 2003. The Purchasing Managers index fell to 49.2, falling to its lowest reading since November 2011. Any figure below 50 shows contraction.
Today’s figures mean that it is the first time that China has failed to exceed the ruling Communist party’s growth targets since the Asian financial crisis of 1998. Failure to hit the annual growth target of 7.5% could also complicate the once-a-decade leadership handover. The outgoing administration has held back stimulus measures in a bid to limit the impacts of the slowing property boom. Any new leaders will most likely be forced to implement some sort of easing measure in a bid to turn the flagging economy around.
“China’s manufacturing sector continues to struggle, weighed down by a significant domestic slowdown, a wholly unsupportive external climate and a completely insufficient policy response,” Alistair Thornton of IHS Global Insight said in a note after the data was released.
China’s economy has been booming in recent years, thanks in part to record lending by Chinese banks, a credit and property boom and demand for Chinese exports. However the credit boom has seen property prices surge upwards and the Euro crisis has hit exports hard.
“If there is no further policy response, it’s very likely that GDP growth will fall below the target and this administration will likely hand over a hard-landing economy to the next one,” said Liu Li-Gang, chief China economist at Australia & New Zealand Banking Group Ltd.
A separate manufacturing PMI released today by HSBC Holdings Plc and Markit Economics was at 47.6, indicating the fastest contraction in more than three years, with an employment index at a 41-month low. A government services PMI showed a faster expansion in August.
If the Chinese economy continues to post negative news than we can expect commodity based currencies to feel the effects. The Australian Dollar has been hit hard over the past few days due to a combination of poor economic factors including the fears over the state of China, the country’s biggest trade partner. The New Zealand Dollar has also been affected.
Some economists are remaining optimistic over the Chinese economy, Alistair Thornton of IHS Global insights said; “The lack of really decisive bold action over the last few months signifies at least in some part the government is content with a growth figure closer to the actual target than perhaps they would have previously liked, They’ve got sufficient clout to turn things around if they really want to and they’ll only really want to when the labour market feels the impact.”
China’s growth rate of 7.5% still towers over the growth rates of many Western economies including the USA and UK.
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