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China Manufacturing PMI Still Heading South—like Its Stock Market

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FXI and ASHR decline

The iShares China Large-Cap ETF (FXI) has shed 15.5% over the past three months, as of October 2, 2015. The Caixin/Markit report for China indicated further weakening in industrial output for the month of September. The Deutsche X-Trackers Harvest CSI 300 China A-Shares ETF (ASHR) is down by about 20% during the same period. These China-tracking ETFs are down by about 11% and 10%, respectively, on a year-to-date basis, as of October 2.

July saw China’s stock market crash. August has seen just as much market turbulence. September hasn’t brought any relief either. FXI is down from its levels above $50 in May to around $35 currently.

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The ADRs (American Depositary Receipts) of Chinese companies 58.com (WUBA), China Mobile (CHL), E-Commerce China Dangdang (DANG), Baidu (BIDU), and Alibaba Group Holding (BABA) have all followed the upsurge and the crash alongside the broad market. For more background, read the series Are You Riding China’s Stock Market Roller Coaster?

Caixin/Markit PMI at a post-crisis low

The final reading for the Caixin China Manufacturing PMI came in at a post-crisis low of 47.2 in September 2015, compared to 47.3 in August. Growth in China’s manufacturing output was restricted by decreases in output, purchases, and new orders. Suppliers’ delivery times lengthened at a faster rate as well. Companies are maintaining relatively subdued growth expectations as demand conditions remain relatively downcast.

Current policy measures adequate for growth target?

China’s central bank and regulatory authorities might have used interest rate cuts and improvements in bank lending as tools to boost economic activity. However, in order for China to meet its annual growth target, additional policy measures like more rate cuts and reductions in its banks’ reserve ratios seem inevitable.

China has a growth target of 7% for 2015. The growth rate in the world’s second-largest economy already declined from 10.4% in 2010 to 7.7% in 2012. The country’s growth rate is now at 7%, but its economic outlook appears weak.

In the next and final part of this series, we’ll take a look at Japan’s industrial sector report, also released by Markit on October 1, 2015.

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