Chinese markets got off to a rocky start in 2016 as weak PMI data and rising tensions in the Middle East sent shares down by 7%. The new circuit breaker system came into effect twice on Monday when the CSI 300 index fell 5%, which led to a halt in trading. Stocks resumed the decline and hit the -7% level, which triggers a complete stop of trading for the rest of the day.
PMI data last week and this morning has been mixed but markets will pay most attention to today's Caixin PMI manufacturing for December, which disappointed quite strongly. The index fell from 48.6 in November to 48.2 in December, in contrast with expectations of a further rise to 48.9. On 1 January the official PMI manufacturing was released, which rose slightly from 49.6 in November to 49.7 in December. The official non-manufacturing PMI rose quite strongly from 53.6 to 54.4, the highest level since June 2014. However, the markets pay most attention to the private Caixin index for the manufacturing sector, which as mentioned was weak this morning.
Overall, the data highlights the fragility of the Chinese manufacturing sector. It should be noted, however, that the decline in Caixin PMI manufacturing comes after two months of decent increases but nevertheless it was surprising that it suffered a setback in December. As Chart 2 shows, the new orders index was broadly flat (47.74 in December from 47.76 in November) and both indices are still off the lows of autumn 2015. The Caixin export orders index fell quite sharply but it also follows a couple of months of increases and is still off the lows. The index still underpins a trend of moderately higher export growth as Chart 4 indicates. While disappointing we do not believe it justifies a 7% decline in the stock market. But clearly tensions in the Middle East are playing a role as well for markets this morning.
The combination of disappointing manufacturing PMI and a positive surprise in the non-manufacturing PMI highlights the ongoing rebalancing of the Chinese economy from investment and export-led growth to more consumer-driven and service sector-driven growth.
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