A private gauge of Chinese manufacturing unexpectedly fell to the lowest in 15 months, reinforcing the need for further policy support in an economy that had seen signs of stabilization recently. Regional stocks fell.
The preliminary Purchasing Managers’ Index from Caixin Media and Markit Economics was at 48.2 for July, down from 49.4 the previous month and worse than all 16 forecasts in a Bloomberg survey, where the median estimate was for an increase to 49.7. Numbers below 50 indicate contraction.
The release weakens the outlook for the world’s second-largest economy, putting pressure on authorities to do more to meet Premier Li Keqiang’s 2015 growth target of about 7 percent. A slump in property investment and the recent stocks rout underscore the risks that remain even after policy makers stepped up support in recent months.
“The industrial sector has seen no sign of stabilization yet,” said Xu Gao, chief economist at Everbright Securities Co. in Beijing, adding that most of the growth stabilization last quarter came from the services sector. “The government should further step up the policy supports, including further boosting infrastructure investment and expediting the debt swap program.”
The MSCI Asia Pacific Index declined 0.7 percent after the PMI report, heading for the lowest close since July 13. Australian shares reversed gains to trade lower. Chinese stocks dropped in Hong Kong, with the benchmark index falling for a sixth week. The Australian dollar dropped to a six-year low and the New Zealand dollar also retreated.
The decline in the manufacturing gauge contrasts with better-than-expected economic growth last quarter. China’s gross domestic product rose 7 percent in the three months through June from a year earlier, unchanged from the first quarter and beating economists’ estimates for 6.8 percent. Industrial output in June rose 6.8 percent, while fixed-asset investment increased 11.4 percent in the first half.
A surge in stock prices that helped boost financial services in the second quarter may have also masked weakness in the real economy, Bloomberg Intelligence analysts Tom Orlik and Fielding Chen said in a report today. The PMI slump strengthens the case for further stimulus, they said. The equity boom turned into a rout in recent weeks.
“A lot of entrepreneurs probably have invested in the stock market and now they have seen a significant loss,” Liu Li-Gang, chief Greater China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong, said in a Bloomberg Television interview. “As a result business confidence has lowered. In the past, sentiment tends to have a lot of impact on this survey.”
The Caixin gauge, previously known as the HSBC PMI, may diverge further with the official PMI in the second half of the year as the government’s support measures will first help bigger companies and state-owned enterprises, said Everbright’s Xu.
“The indicator may fail to grasp the overall picture of the Chinese economy,” said Li Wei, China economist for Commonwealth Bank of Australia in Sydney. “This indicator mainly covers small businesses with big export exposure, and these businesses are doing less well than bigger players.”
Much like last year, a sluggish start spurred more stimulus as the government orchestrated a debt swap for provinces and the central bank accelerated monetary easing. The PBOC cut the benchmark one-year lending rate to a record low of 4.85 percent in June.
“The overall economy won’t be that bad,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. “Meanwhile, it shows that China’s economic recovery is still mainly helped by government-backed spending, and the private sector activities remain sluggish.”
— With assistance by Xin Zhou