Weak factory data roils China markets


Shares on the Shanghai and Shenzhen exchanges were suspended on the first trading day of the year after stock prices plunged following indications that December manufacturing activity in China contracted for the 10th consecutive month.

A general slowdown in China’s economy is affecting the markets but the dismal factory data sparked a volatile morning of trading. The 24-hour suspension was triggered when the markets fell by more than 7 percent during the day, the first time this “circuit breaker” has been used since being introduced by the securities regulator in September.

The China Caixin purchasing manufacturing index, reported by Markit Economics, fell to 48.2 in December, the lowest level it has been at in three months as decreasing new orders led to a drop in production.

Client demand was weak both in China and abroad, with new export business falling for the first time in three months, Markit Economics said in a statement. Manufacturers continued to trim their staff numbers and reduce their purchasing activity in line with lower production requirements.

Anything above 50 indicates expansion in manufacturing output, while below 50 shows contraction. Manufacturing PMI in China averaged 49.40 from 2011 until 2015, reaching an all-time high of 52.30 in January 2013 and a record low of 47.20 in September last year.

But the weak December orders could mean the traditional surge in container exports in the buildup to Chinese New Year may be weaker than usual. Chinese New Year falls in the second week of February and beneficial cargo owners generally try to get their cargo shipped before the factories close for what can be three weeks.

Foreign direct investment practice Dezan Shira & Associates said in its China Briefing that global manufacturing capacity is moving to Vietnam and India so it was hardly a surprise that China’s own manufacturing sector was shrinking as a result.

Manufacturing activity in Vietnam expanded in December with the PMI at 51.30, up from 49.40 in November. The PMI in Vietnam averaged 50.67 from 2012 until 2015, reaching an all-time high of 54.80 in May of 2015 as the country continued to capture market share from its giant northern neighbour.

The FDI firm expects major benefits for Vietnam manufacturing from the ASEAN Economic Community, which now allows the free flow of goods, services, investments, and skilled labor, and the freer movement of capital across the region.

“The AEC deadline, combined with upcoming profits tax reductions, will provide a significant boost for determining the economics of manufacturing in Vietnam to resell to the Chinese market, as import tariffs will be reduced, and these, combined with Vietnam’s far lower production costs then make a case for placing part of the production facility into the country,” the FDI firm said.