China’s official Manufacturing Purchasing Managers’ Index (PMI) fell to 49 in October, a drop from the previous month’s 49.8. The China Federation of Logistics and Purchasing (CFLP) published some timely big picture statistics toward month’s end. Through the monthly Jobs Report, this data is one of the most prominent headlights used to gauge the country’s economic health. That was bad, beating analysts’ expectations for an increase of 0.2%. They had already lowered their forecast to 49.6, and now fears are spilling over into what this means for markets at home and abroad.
The Manufacturing PMI also has an extremely important impact in financial markets over every asset class. This is in part because China’s influence over the global economy is so large. The index ranges from 0-100. A reading of 50.0 indicates no change in manufacturing activity compared to the month prior. A number above 50 indicates a growing manufacturing industry, and a number under 50 points to a shrinking manufacturing sector.
The Importance of PMI Data
The CFLP publishes its Manufacturing PMI on the last day of every month. Furthermore, this report provides stakeholders with timely insights into the real-time state of manufacturing activity in China. Investors and economists alike watch this data like a hawk. It’s a great window into the manufacturing sector as a whole and looks forward to trends in key economic metrics such as GDP, industrial production, employment and inflation.
The monthly PMI survey is made up of subjective responses from purchasing managers in all types of firms. These survey participants rate their experiences this September compared to the one just previous in August. Their assessments provide a great window into the mood for business in the manufacturing area. The PMI has become one of the most trusted economic barometers. That’s doubly dangerous because it drives the priorities of both investors and policymakers.
Implications for the Renminbi and Global Markets
The drop-off in China’s Manufacturing PMI has immediate, direct consequences for the Renminbi (CNY). A level below 50 is usually interpreted as meaning that activity is contracting among goods producers. This decline can produce a negative sentiment for the currency. Because China’s economy has become such an important part of global trade, changes in the Renminbi can be felt across world markets.
Even more troubling, analysts warn a faltering manufacturing could sow panic about China’s overall economic stability and growth prospects. The anticipated slowdown may result in reduced demand for commodities and other goods from trading partners, impacting global supply chains and economic performance in other countries.
Here’s why China is staring down the barrel of a massive economic crisis. As always, the monthly PMI data is an indispensable barometer for gauging the nation’s economic course. Whatever the merits of these figures, investors will be quick to respond negatively. Depending on how they assess the potential risks and opportunities presented by the rapid ongoing shifts in China’s manufacturing landscape, they will pivot accordingly.
Future Outlook
It goes without saying that market participants will scour the subsequent PMI releases. They are looking for more evidence of economic rebound or even a deeper economic sinkhole. The growing sensitivity of financial markets to these kinds of indicators further stresses the need for quick and accurate stat data dissemination.
Analysts have been surprised by the manufacturing contraction of late. Their first recommendation is that policymakers should adopt direct measures to boost growth in the industry. Beyond short-term monetary responses this can mean fiscal policy aimed at increasing domestic demand and shoring up firms.
As global economic interdependencies continue to grow in complexity, it will be increasingly important for stakeholders across the globe to understand China’s manufacturing trends. Moving forward, the monthly release of the new Manufacturing PMI will be key for assessing China’s economic wellbeing. Perhaps more importantly, it will have a tremendous impact on global markets.