China’s Preliminary Manufacturing PMI at 6 1/2 Year Low; Raising Hopes For Further Stimulus

rate cutAsian stocks are in selloff mode and U.S. stock futures are pointing to a negative opening at the opening bell on Friday following the release of a preliminary manufacturing report today that showed Chinese manufacturing production declined to a 6 1/2 year low in August, revealing further weakness in the world’s second largest economy, just one week after China’s central bank devalued their currency to help revive its exports.

According to the preliminary Caixin China Purchasing Manager’s Index, manufacturing declined in August to 47.1, setting a new 77 month low, and lower than 47.8 in July with its final PMI reading.

A final PMI reading for August will be released on September 1st. The index is viewed as a key indicator of the country’s economic health.

The estimate is mostly based on 85-90 percent of total PMI survey responses each month collected between August 12-19th.

A PMI reading below 50 represents economic contraction and a reading above 50 represents growth.

Despite recent efforts from China’s central bank to add monetary easing and stimulus measures over the past year, including 4 interest rate cuts since November 2014, the Chinese economy is weakening.

Worse than expected economic data over the past several weeks has led economists to question whether China’s 7 percent GDP target is still attainable in 2015.

Signs of a slowdown in China’s economy has helped to accelerate the recent selloff in crude oil and commodities.

Some economists believe that the latest weakness in manufacturing will lead China’s central bank to provide additional stimulus measures to get China’s economy into better shape for a stronger rebound that allows China’s economy to reach its growth target.

“The Caixin Flash China General Manufacturing PMI for August has fallen further from July’s two year low, indicating that the economy is still bottoming out” said Dr. He Fan, chief economist at Caixin Insight Group.

“But overall, the likelihood of systematic risk remains under control and the structure of the economy is still improving” Dr. Fan added.

“There is still pressure on the front of maintaining growth rates, and to realize the goal set for this year, the government needs to fine tune fiscal and monetary policies to ensure macroeconomic stability and speed up structural reform” Dr. Fan concluded.

-Johnathan Schweitzer

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