China's Manufacturing Sector Contracts

China’s manufacturing and factory sector hit an 11-month low in March, alarming investors worldwide. This indicator is yet another under-performing expectation that will likely have a negative effect on China’s gloomy first quarter. Ultimately these results are detrimental to the Chinese Government's 7% GDP growth target and will likely lead to new stimulus measures during a period of slow economic grw.

The survey, called the preliminary purchasing managers’ index (PMI), was found and taken by research firm Markit and sponsored by the HSBC of the United Kingdom. The PMI for March was found to be 49.2, well below the expected forecast of 50.6. In February, the PMI was 50.7. Any score below a 50 indicates contraction and this measure specifically reveals shrinking new orders and a weaker economy.

Due to the Chinese government’s target of sustaining a 7% GDP growth rate for the year, the pressure from missed sector projections such as the retail industry in addition to manufacturing will put increasing pressure on the government to act. To help alleviate the ailing sectors, China will have to loosen some economic regulations while implementing new economic policies to provide a stimulus to revert these losses. Examples of pro-growth economic policies include reducing interest rates and capital reserve requirements. These two measures incentivize capital expenditures and encourage more cash flow into the markets. An additional measure that would be much welcomed across the broad would be an uptick in government spending, but the government has been reluctant because of optimistic outlooks.

Though this data may cause a little scare, the labor market and firm performance remain constant and balance out the overall economy. China’s first quarter results have yet to be released but will likely miss projections due to the weaker retail and manufacturing industry measures.