China, the world’s second largest economy and a key market for many nations, began 2016 with a slowed economic pace, as the manufacturing industry contracted for the fifth month straight in December. This suggests that the government may have to implement new policies to prevent a potential slowdown. The services sector ended positively, but the economy as a whole is still on track to grow at its slowest pace in a quarter of a century.
In December, the official manufacturing purchasing manager’s index stood at 49.7, which was up only fractionally from November’s index. According to Zhou Hao, a senior economist at Commerzbank in Singapore, the slight improvement in manufacturing had suggested that growth is stabilizing but the sector will still face challenges in the coming year. Demand has weakened both at home and abroad, which has caused excess capacity in Chinese factories and consequently forced them to cut prices.
As a result of these economic problems and a major selloff in China, U.S. stock prices have fallen sharply. The Dow and the S&P fell about 1.6%, while the NASDAQ lost more than 2% at the close of trading. This began Monday, when Chinese stocks plummeted nearly 7%, prompting officials to stop trading on the Shanghai and Shenzhen exchanges for the day. Investors saw the reports of the Chinese economy slowing down and as a result the selloff occurred. European markets also followed Asia’s lead, with Germany’s DAX losing more than 4% and the FTSE in London falling more than 2%.
Still many believe that China’s stock market is little cause for concern. In China, the stock market can’t be seen as a leading indicator of the economy, according to chief global investment strategist Charles Schwab. Economists expect growth of 6.5% to happen this year. Although it is a far cry from the days when China had GDP growth of 10% regularly, it should be strong enough to maintain employment levels as reforms begin to be implemented.