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China stock slide on weak factories

February 1, 2016

Chinese shares have stumbled lower after January updates on the country's huge factory sector fell to their lowest since mid-2012, showing that too much capacity is chasing too little demand.

China Wirtschaft Fabrik Produktion
Image: Reuters

China's Shanghai Composite Index eased 1.6 percent on Monday, while the CSI300 index of the largest listed companies in Shanghai and Shenzhen lost 1.4 percent.

The slide in the country's stock markets came as a key indicator of China's manufacturing sector fell in January for the 11th straight month. The purchasing managers index (PMI) released by Caixin Insight Group showed a reading of 48.4 points, with a figure below 50 indicating a negative outlook as measured by managers' purchasing intentions.

"Recent macroeconomic indicators show the economy is still in the process of bottoming out and efforts to trim excess capacity are just starting to show results," said Caixin chief economist He Fan. "The pressure on economic growth remains intense in light of continued global volatility."

The economist added that the government must monitor economic trends closely and make fine adjustments to avoid a hard landing. It must also push ahead with reforms to strengthen market confidence.

Japan stocks rising

Worries about the slowdown in the world's second biggest economy were among the key reasons for a rout across global stock markets in January that wiped trillions of dollars off valuations.

Last week, however, central banks from Asia to the Americas looked to support world markets. The European Central Bank indicated it was ready to ease monetary policy further in March, while the United States Federal Reserve held off another interest rate hike. And the Bank of Japan announced it would effectively start charging commercial lenders to park their cash with the central bank.

As a result, Tokyo's Nikkei index soared two percent on Monday, extending a 2.8-percent gain Friday. Adding to the buying pressure in Japanese markets was a 12.4-percent surge in Sony, which on Friday posted a nine-month net profit of almost $2.0 billion (1.84 billion euros) thanks to huge demand for its PlayStation video games console and image sensors.

Chinese currency in the focus

Meanwhile, the People's Bank of China (PBoC) has managed to calm fears of an imminent devaluation of its yuan by holding its midpoint reference rate steady for a while.

Monday's fix of 6.5539 yuan per dollar was just a bit softer than Friday's, even though the dollar had climbed broadly elsewhere in the wake of the Bank of Japan's easing.

Still, many analysts suspect the currency will be allowed to move lower over time, and some US-based hedge funds are actively betting on it.

Chinese state-run media have carried repeated warnings to offshore speculators against trying to profit from a yuan devaluation. Such reports will only heighten the focus on the PBoC's reserves position, due to be reported some time this week, for details on just how much intervention has been needed to shelter the yuan from capital flight.

uhe/bea (Reuters, dpa, AFP)