China’s struggles with its slackening demand and excess industrial capacity are jolting financial markets around the world and threatening to hit global supply chains.
Shares on global markets tumbled and currencies weakened on the first trading day of the year, making it more likely that Beijing will take stronger action to shore up the country’s economy.
That may include more action to shore up exports, an effort that will be helped by the decline in the Chinese yuan this week to its weakest level versus the dollar in nearly five years.
But the currency dive also pushed down other Asian currencies, raising fears that China will drag down neighbouring economies.
At the heart of the concern is the latest drop in a closely watched private index of Chinese manufacturing, which also showed measures that track production, new orders and new export orders all declined.
Economists say China is still trying to balance supply and demand, an effort that so far has its trading partners very much on edge.
While China’s manufacturing falters, U.S. factories are stumbling and signalling lighter activity in the coming months. The Institute for Supply Management’s gauge of manufacturing activity fell to 48.2 last month, the lowest level of the year.
The measure for new orders continued to contract in December while inventories and customers’ inventories both ticked upward. That suggests American businesses are hunkering down, waiting to see if demand justifies speeding up their supply chains.
The signs of hope came in export orders, which expanded after six months of decline, but that business faces big headwinds as the dollar remains strong and commodities prices sag.