Bad China prospects aggravate markets fall
Shocked by Fed Chairman Ben Bernanke's ambiguity over quantitative easing, global markets were also hit by bad Chinese factory data showing a weaker outlook
The Nikkei fell 7% and all major Asian indexes finished in the red, while other European and emerging market stocks fell heavily after Bernanke hinted at tapering off the Fed's quantitative easing program and as flash HSBC PMI data for China showed manufacturing contracting in May.
PMI fell to 49.6 from April's 50.4, while most analysts had expected little change. It is the first time since October that the flash HSBC PMI for China fell under the 50 mark that separates contraction from expansion.
"Today's sub-50 reading on the flash PMI will shake the confidence of China's policymakers, who have remained sanguine in the face of slow growth so far this year," Capital Economics' chief Asia economist Mark Williams wrote in a market note.
While policymakers will likely resist temptation to inject further fiscal and monetary stimulus as this would increase risks of financial instability, they may tone down their efforts to rein in credit growth, Williams predicted.
"This drop of HSBC flash PMI is largely a result of weak external demand and inventory destocking," Bank of America Merrill Lynch analysts Ting Lu and Larry Hu said, noting that the PMI was in line with other data such as daily power output, which fell to around 5% year-on-year in the first 20 days of May from April's 6.2%.
Societe Generale's China analyst Wei Yao said that the data "pretty much dashed hopes of a second-quarter growth recovery," blaming domestic weakness for the fall.
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She noted that new orders fell below 50 for the first time in eight months while the export orders index, although still in contraction, "improved somewhat" to 49.5.
"It seems that domestic demand was the major source of deterioration this month," Yao said. "The employment index dropped for the fifth consecutive month to 49, which doesn't bode well for the consumption outlook."
Yao added that since the Chinese government seems committed to "cautious easing only," she would "continue to stay on the bearish side in terms of economic growth."
Williams pointed out that the Chinese PMI has averaged 49.8 over the past 12 months, with industrial production expanding 9.5% over the same period.
"The reality is therefore probably not quite as bad as may first appear," he said. "But it is bad enough, with the economic slowdown apparently deepening after a weak first quarter."
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