World Economy

China’s Economic Slide Deepens

China’s Economic Slide DeepensChina’s Economic Slide Deepens

Activity in China’s vast factory sector likely contracted for the sixth consecutive month in January, a Reuters polled showed, underlining a weak start for the year and heightening concerns of a deeper economic slowdown.

The official manufacturing Purchasing Managers’ Index likely edged down to 49.6 in January from December’s 49.7, according to a median forecast of 20 economists in a Reuters poll.

A reading below 50 index points suggests a contraction in activity, while a reading above indicates an expansion on a monthly basis.

As the first indication of economic sentiment in 2016, the headline data might be distorted by the week-long Lunar New Year break, which begins on Feb. 7, analysts said.

“Manufacturers shut factories weeks before China’s Lunar New Year Holiday, which would drag down factory output,” said Zhang Yiping, an economist of China Merchants Securities in Shenzhen. “We expect China’s economic growth to show a certain degree of slowing down in the first quarter.”

Aside from seasonal factors, analysts noted that China’s economy would continue to fight headwinds from industrial overcapacity, high debt and a cooling property market this year.

China’s economic growth cooled to 6.9% in 2015, the slowest pace in 25 years, adding pressure on policymakers who are already struggling to restore the confidence of investors after a renewed plunge in stock markets and the yuan currency.

China markets began the year with a series of precipitous stock market declines and a sharp depreciation in the yuan. Selling pressure has persisted as economic data confirmed slowing growth and deteriorating business conditions.

The official PMI number will be released on Feb. 1, along with the official services PMI.

  Shares End Lower

Chinese highly volatile shares ended lower again on Wednesday after plunging on Tuesday, taking losses in 2016 to about 22% or 12 trillion yuan ($1.8 trillion).

The benchmark Shanghai Composite Index ended down 0.5%, having been up in the morning and as much as 4% lower during the day. It tumbled 6.4% on Tuesday to its lowest close since Dec. 1, 2014. The CSI300 index of the largest listed companies in Shanghai and Shenzhen ended down 0.3% after a similar rollercoaster ride.

Gu Yongtai, analyst at Cinda Securities, said the prospect of investors having to sell stocks they bought with borrowed money in order to cover margin calls has also hurt sentiment.

“There’s fear that stock price falls would trigger margin calls, which then adds further pressure on prices, although the actual amount of forced liquidation is not as big as people would imagine,” Gu said. Four listed companies suspended trading in their shares on Wednesday, saying their major shareholders, who have pledged shares as collateral, face margin calls and would seek ways to avoid forced liquidation.

  Iron Ore Output Falls

China’s run-of-mine iron ore output fell by 7.7% on year in 2015 to 1.38 billion metric ton, latest data released by the National Bureau of Statistics showed.

The fall was less than the minimum 10% drop expected by market participants. The decline in 2015, however, was in contrast to the 3.9% year-on-year rise seen in 2014.

China’s independent iron ore miners suffered most due to the low price environment and had to shut mines towards the end of last year.

“I shut my three mines one after another over November-December 2015, so for my own operations, [the output decline] is even more than 10%,” a source at a 2 million mt/year iron ore mine in Liaoning province said Tuesday.

With price of 64%-Fe iron ore concentrate dropping below yuan 300/wet mt ($46/wmt) in Liaoning, the source said it was meaningless to keep mines in operation amid stiff competition from better and more affordable Australian and Brazilian iron ore imports.

Australian and Brazilian iron ore supplies accounted for about 85% of the country’s total consumption in 2015, up from around 65% a decade ago, according to official data.

China’s iron ore concentrates typically have 64-66% ferrous content and are used for either sintering or pelletizing.