Weak China Factory Output Number Dampen Growth Hopes

The latest report out of China, its Flash China Manufacturing Output Index, pointed to a drop in factory activity for the third straight month in May, down to 48.4 from an April high of 50.0 and hitting a 13-month low.

The continued weakness in the world’s second largest economy is a clear indication that a strong dose of aggressive stimulus measures is needed. Beijing has cut interest rates three times in the last six months but economists believe it will have to ease rates even further in order to forestall a continued slowdown that has already dropped rates to below 7 per cent in the first quarter of the year.

The HSBC Flash China Manufacturing Purchasing Managers’ Index (PMI) is published on a monthly basis ahead of final PMI data, making it the earliest available indicator of manufacturing conditions in China.

Commenting on the PMI survey, Annabel Fiddes, Economist at Markit said: “The Flash China Manufacturing PMI pointed to a further deterioration in operating conditions in April, with production declining for the first time in 2015 so far.”

Not As Effective as Fed or ECB

Investors should not expect additional interest cuts by the People’s Bank of China to have the same effect on the economy as did the stimuli from the Federal Reserve and the European Central Bank which created a domino effect in foreign financial markets.

According to economists from UBS Group AG, China’s stimulus until now has been weaker than that of the Fed or ECB, and “money growth is still not rising aggressively and interest rates adjusted for inflation only falling modestly even after three reductions in six months.”

“The stimulus which has been injected is also unlikely to reduce the cost of risk as much as similar actions did elsewhere,” says UBS.

Citing the Fed cut on its benchmark borrowing rate to zero and its effect on global markets, USB pointed out that there are only a few international firms that raise funds in the yuan, so any PBOC move will have far less impact on lowering the cost of equity as much worldwide.

Cina Coren
Cina Coren is a former Wall Street broker and financial advisor. She holds a Master's degree in Communications and spent many years writing for international news outlets and journalistic publications. Today, Cina spends most of her time writing internet articles and blogs, and reading various newspapers to stay on top of the news.