Chinese factory gauge slumps to lowest since Mar '09

A private Chinese manufacturing gauge fell to the lowest in six and a half years, underscoring challenges facing the economy as its old growth engines splutter.

A global sell off in riskier assets gained pace after the preliminary purchasing managers' index (PMI) from Caixin Media and Markit Economics dropped to 47.0 in September. That missed the median estimate of 47.5 in a Bloomberg survey and fell from the final reading of 47.3 in the previous month. Readings have remained below 50 since March, indicating contraction.

Premier Li Keqiang's growth target of about seven per cent for this year is being challenged by a slowdown in manufacturing and exports even as services and consumption show resilience. President Xi Jinping downplayed the concern about weakening growth in a speech in Seattle to mark the start of his US trip, repeating a prior pledge that China can maintain medium to high growth.

Excess capacity "across a number of industries, as well as demand weakness, both domestically and externally, remain the major challenges faced by the manufacturing sectors," Grace Ng, a greater China economist at JPMorgan Chase & Co. in Hong Kong, wrote in a report. She said the level of supplies of finished products, which rose to the second-highest level in the survey's history, "points to further drag on industrial activity in the near term."

The Shanghai Composite Index closed 2.2 per cent lower at 3,115.89 while Hong Kong's Hang Seng Index retreated 2.3 per cent. The offshore yuan weakened the most in three weeks, falling to 6.4328 against the US dollar as of 4:35 p.m. in Hong Kong.

The soft PMI "mainly reflected weak external demand," said Julia Wang, a Hong Kong-based economist with HSBC Holdings Plc. "As China has rolled out a slew of pro-growth measures in the past months, China's domestic demand may have stabilised."

Wang expects more policy support and forecasts another 150 basis points cut in the required reserve ratio for the biggest banks. She said Caixin's index covers firms with more exposure to exports, and indicators in coming months might show the economy is not as sluggish as the flash PMI indicates.

Readings of output, new orders and employment - all declined at a faster rate, according to the survey.

"The new leg down in the manufacturing PMI redoubles pressure on the government, to allow market forces to guide the yuan weaker against the dollar before year-end," William Adams, senior international economist at PNC Financial Services Group, wrote in an e-mail.

Factory shutdowns
Reflecting the slowdown in China's old growth drivers, fixed-asset investment rose at the slowest pace in 15 years in the first eight months of 2015 and industrial production trailed analyst estimates last month. Factory shutdowns in Beijing and surrounding provinces before a September 3 military parade in the capital might also have weighed on the manufacturing sector.

For Federal Reserve Chair Janet Yellen, who cited concern over China's outlook when explaining her decision not to raise interest rates at this month's policy meeting, more weak numbers could strengthen the case for prudence, Bloomberg economist Tom Orlik wrote in a note.