China's vast factory sector shrinks

After surprising global markets by devaluing its currency last week, figures confirm world’s second largest economy is slowing down

Photo by: Reuters
Photo by: Reuters

An investor looks at an electronic board showing stock information at a brokerage house in Nanjing, Jiangsu province, China, July 24, 2015


Signs China's slowdown is getting worse and weak growth in Europe have further damaged the outlook for the global economy, sending stocks and commodity prices reeling on Friday.

China's vast factory sector shrank at its fastest rate in almost 6 and a half years in August, a private survey showed, pushing investors who fear China's sagging economy will translate into slower global growth to take refuge in gold and bonds.

World markets had already been on edge after China's surprise devaluation of the yuan last week and a near-collapse in its stock markets in early summer.

"Uncertainty about China growth is now the main swing factor in markets," said Tim Condon, an economist at ING Group in Singapore.

"Today's data reinforced the doubts about global growth."

The preliminary Caixin/Markit China Manufacturing Purchasing Managers' Index (PMI) stood at 47.1 in August, well below a Reuters poll median of 47.7 and down from July's final 47.8.

It was the worst reading since March 2009, in the depths of the global financial crisis, and the sixth straight one below the 50-point level, which separates growth in activity from contraction on a monthly basis.

Euro zone business growth unexpectedly accelerated this month but remained tepid, according to surveys out of Europe, while a similar index due later from the United States is expected to show only a modest pick up in factory growth.

World stock markets tumbled towards their worst week of the year and commodities got another kicking, as the data sent investors scurrying to the safety of bonds and gold.

Analysts still expect the US central bank to raise interest rates this year, possibly as soon as next month, though minutes from the US Federal Reserve's last meeting in July showed policymakers discussed China, Greece's debt crisis and the weak state of the global economy.

The downdraft from China is particularly rattling economies of its trade-reliant Asian neighbors.

South Korea, which counts China as its biggest trading partner, said on Friday its exports slumped and Taiwan reported on Thursday its export orders in July fell more than expected.

And while a similar factory survey in Japan pointed to a pick-up there due to stronger domestic demand, policymakers in Tokyo are keenly aware of the dangers if China slows further.