Services, meanwhile, stayed in expansion mode, but eased from the 16-month high hit in December.
The National Bureau of Statistics of China just reported industrial profits contracted by between 2 and 4 percent, depending on the sector, with mining profits falling 58 percent year on year.
All of these point to weakness in the region's largest economy, which in turn points to more volatility in financial markets.
April Lee Tan, head of research at COL Financial, said this is part of an economic transition in China, a shift from relying on industrial output and exports, to a more "stable and defensive" growth driven by domestic consumer spending.
Tan said the shift is necessary if China wants to become more like the no. 1 economy, the US.
The view is shared by HSBC. In its Investment Strategy Report for 2016, HSBC said "China's slowdown contributed to damp global trade via a slowdown in manufacturing, but the country's services sector continues to improve in a dynamic that is typical of an economy moving towards 'developed status.'"
Therefore, the situation is promising because China's economy is behaving the way its policy makers wants it to. It is now just a matter of services, and consumer demand, growing strong enough to replace industry as the driver of China's economic engine. When that will happen is anyone's guess right now.
Obviously, China's transition will affect how the global economy works. Tan said commodities will be impacted greatly, with China being the largest consumer of industrial metals and oil.
Tan said once China truly transitions into a consumer-driven economy, miners will no longer enjoy "demand for precious metals, industrial metals" because the largest market in the region will be demanding consumer products instead.
Weakness in China, or weak demand for oil there, is already one of the themes behind multi-year lows in world oil prices, the other being the supply glut forced onto the market by the organization of petroleum exporting countries.
Industrial metals have also been falling since last year, and some of the clear losers in that respect have been Filipino nickel miners, including Nickel Asia, which has seen its stock price plunge.
Benjamin Pedley, regional head of investment strategy for HSBC Asia, said the foreign exchange market will likely remain volatile until there is some stability in China, as well as energy markets.
Pedley said, "If and when we get stability coming back from Chinese economic growth data, stability in energy markets, then that might be the situation where we see emerging market currencies stabilizing against the US dollar, but at this stage, we are not at that point."
However, Pedley said equities, specifically in China, the Philippines and Indonesia, only face limited downsides, because stocks there have already fallen so much, making share prices very attractive.
In China alone, shares in Shanghai and Shenzhen lost about $2 trillion in market value just last month. HSBC said this means so many quality companies are trading at affordable prices, and this is why it is overweight in China, the Philippines and Indonesia.
On top of that, Pedley is also confident the People's Bank of China (PBOC) will not sit by and watch the Chinese economic slowdown get out of hand.
Pedley rears to the "policy put" which simply means no matter how bad things get, policy makers can react to get the situation back under control. The PBOC has already intervened several times in January to limit volatility in China's stock and currency markets.
In Japan, the Bank of Japan just surprised the world with negative interest rates to further its efforts in boosting Asia's second largest economy. Pedley said whatever the situation, policy makers can and will intervene to smooth out the ripples.
That said, investors still need to tread carefully, because timing the end of all of this market volatility is still hard. HSBC's Herald van Der Linde said, "If I look at it at a 12-month basis, medium term, do I think money will flow back into Asia, yes I do think money will start to flow back. we will need to see a few things, better Chinese numbers, and maybe for example commodity prices need to stabilize."
So, at the very least, a turnaround should happen for markets like the Philippines within 2016.
source: www.abs-cbnnews.com
