Bleak China economic outlook rattles Markets

Worries about China’s economic growth were sharpened by a disappointing report on that nation’s huge manufacturing sector on Tuesday.

China stocks 2508Beijing, September 01, 2015.- Prices on the Shanghai market fell drastically at the open, but regained some strength to close at a loss of just under 1.3 percent, as Chinese officials insisted the situation is under control.

Key stock indexes in London, Paris and Germany were down nearly three percent, while U.S. market indexes were off around two percent in early trading.

China’s official manufacturing index for August fell slightly to its lowest level since 2012. A survey by Markit, which focuses on smaller private firms, showed factory activity at the weakest performance level in six and a half years.

China is evolving from an export-driven manufacturing economy toward one based more on services and domestic demand. The world’s second largest economy is also struggling with market-oriented reforms intended to make the economy more efficient and productive. China has been an engine of economic growth for many years, so changes, and setbacks there, ripple through the global economy, affecting stock and commodity prices in particular.

Bumpy ride
The developments have been so significant that Japan’s finance minister, Taro Aso, suggested on Tuesday that the Chinese economy be a focus of this week’s meeting of the Group of 20 major economies.

Aso said that instead of being swayed by superficial market moves, he believes it is important to understand the structural issues affecting markets in China.

“I think it’s beneficial to hold a frank debate at G20 on what is happening in the Chinese economy,” Aso said.

During a visit to Indonesia on Tuesday, International Monetary Fund Director Christine Lagarde urged emerging economies to be vigilant for spillovers from China’s slowdown.

Lagarde said that China’s slowdown was not sharp or unexpected, but it is clear the country is adjusting to a new growth model.

«The transition to a more market-based economy and the unwinding of risks built up in recent years is complex and could well be somewhat bumpy,» she said.

An official at China’s National Development and Reform Commission, the country’s top economic planning agency, said Tuesday that stock-market volatility has been contained, and that the country can push forward with market reforms.

Sentiment sinking
China has unleashed a flood of measures to defend market prices, but the index continues to fall. The main index in Shanghai is down about 40 percent since mid-June.

For many who watch the market, it is hard to tell just how low the index could go.

«For now, no one can say for sure if the markets have hit rock bottom,» said Lu Suiqi, an associate professor of economics at Peking University.

New measures announced by the government on Tuesday, including policies to support mergers and acquisitions, cash dividends and share buy-backs by listed state-owned companies, did little to boost sentiment.

Critics contend such reforms are a dead end when it comes to the long-term health of the Chinese economy.

«If [policy-makers in] China continue the mindset of making state-owned enterprises bigger and stronger, such state-owned enterprises will still be short of efficiency and fair play,” said Hu Xingdou, an economics professor at Beijing University of Technology.

What is more important is to attract more private investment and encourage the privatization of state-owned enterprises, he said.

Hu said efforts to prop up the market before this week’s massive military parade in Beijing can only fuel unrealistic expectations among investors for a government bailout. Such tactics also violate free-market mechanisms, he said.

«Between the government [intervention] and the market [reform], China on the one hand allows market [forces] to prevail, but on the other hand, it has overdone it when it comes to intervention,» Hu said.

Liao Qun, chief economist at China CITIC Bank, says that while the China’s manufacturing industry is performing poorly, services continue to do better than anticipated. He believes it will take some time for the overall economy to rebound.

“In the short term, the government still needs to expand its pace of monetary easing and the use of fiscal stimulus to help stabilize demand,” Liao said.

Growth forecasts cut
The turmoil in China’s stock market and devaluation of its currency has led economists at Goldman Sachs to slash their forecasts for China for the next three years, saying that by 2018 China’s economic growth is expected to slow to 5.8 percent.

Goldman Sachs expects growth of 6.4 percent and 6.1 percent for China in 2016 and 2017.

According to Reuters news agency, economists at ANZ are also rethinking their forecasts. Based on the manufacturing data released Tuesday, ecopnomists said they expect China’s economy to grow by 6.4 percent in the third quarter but to rebound with policy support to 6.8 percent in the fourth and last quarter of the year.

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