ANALYSIS: Impact of China's manufacturing contraction

MANILA - China manufacturing contracted for a sixth straight month to start 2016, with January producing the weakest reading for the Caixin Manufacturing Purchasing Manager's Index since August 2012.

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

China jitters send stocks tumbling

LONDON - World stocks and commodity prices tumbled on Tuesday, as poor Chinese data saw fears about its economic health intensify.

After a relatively upbeat few days for world markets, concerns about China were reignited by surveys that showed its giant manufacturing sector shrinking at its fastest pace in three years and its services sector also cooling.

Asian stocks, particularly in Japan and Australia, had swooned overnight, and the gloomy mood remained in Europe as the pan-regional FTSEurofirst 300 opened down 2.5 percent after its worst month in four years.

London, Frankfurt and Paris were down 2.3 to 2.5 percent and oil was also back in the red as it cut almost $1.5 off the $10 it had leapt between Thursday and Monday, which had been its biggest three-day surge in 25 years.

"The problem is that we have these brief spells of optimism like we had last week when U.S. GDP was revised up, but the overall theme is still the weakness in China and that is very hard to dispel from markets," said Philip Marey, a strategist at Rabobank in the Netherlands.

U.S. stock futures were also down 1.5 percent, while the mood was similarly wary in the currency and bond markets.

The safe-haven Japanese yen and the low-yielding euro, which has also been back in favor following its recent Greece-related falls, both rose against the dollar, to 120.16 yen per dollar and $1.1323 to the euro.

Gold another favorite of investors during periods of uncertainty, was up at $1,141 an ounce having risen 3.5 in August, its best month since January

The head of the International Monetary Fund, Christine Lagarde, summed up the situation saying in a speech in Indonesia that global economic growth was now likely to be weaker than had been expected just a few months ago.

She cited both a slower recovery in major advanced economies and a further slowdown in emerging nations and highlighted the need to "be vigilant for spillovers" from China's stutters.

"The transition (in China) to a more market-based economy and the unwinding of risks built up in recent years is complex and could well be somewhat bumpy," she added.

CAUTION! FRAGILE CHINA

The latest bout of volatility had been kicked off by losses on Wall Street overnight after comments from Federal Reserve Vice Chairman Stanley Fischer appeared to keep alive the chances of a U.S. interest rate hike in September.

China's official Purchasing Managers' Index (PMI) then compounded matters, falling to 49.7 in August from the previous month's reading of 50.0, its weakest showing in three years.

"Recent volatilities in global financial markets could weigh on the real economy, and a pessimistic outlook may become self-fulfilling," said He Fan, chief economist at Caixin Insight Group. A separate survey from Fan's organization had also shown the country's services sector slowing.

MSCI's broadest index of Asia-Pacific shares outside Japan slipped 0.6 percent to extend the more than 10 percent it had lost in August.

Chinese shares had remained relatively steady, with the Shanghai Composite Index down a modest 1.2 percent and the CSI300 index almost flat.

Instead the pain was felt elsewhere. Japan's Nikkei slumped 3.8 percent after tanking 8.2 percent in August. Australian, Indonesian and Hong Kong stocks were all down by more than 2 percent.

Metals markets were straining again too. London Metal Exchange copper fell 1 percent to $5,087.50 as markets reopened after a long bank holiday weekend, nickel slid 2 percent while aluminum and tin skidded too.

One of the other recent victims of the China jitters, the Australian dollar, edged up however, adding about 0.2 percent to $0.7125 after the Reserve Bank of Australia held Aussie interest rates steady.

source: www.abs-cbnnews.com