China’s Manufacturing Sector Continues to Shrink

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Latest government data released Monday shows that manufacturing activity in China is contracting and nearing 3-year lows, exposing a major weakness in China’s economic model.

The official Purchasing Managers’ Index (PMI), which tracks activity in Chinese factories, plunged to 49.4. Its lowest level since 49.2 in August 2012.

The PMI is rated based on five major indicators, which include new orders, inventory levels, production, supplier deliveries and employment environment.

The latest figure is also below the median forecast of 49.6, which was derived from a Bloomberg-sponsored survey of economists.

PMI figures are closely monitored by investors worldwide as the numbers typically signal China’s economic monthly outlook. Data higher than 50 indicate expanding activity, while numbers below the 50 threshold usually mean contraction or shrinkage.

Chinese shares fell sharply following the release of disappointing figures, with the main main benchmark Shanghai Composite Index slipping by 1.78%. The Shenzhen Composite Index was also down 1.04%.

The Purchasing Managers’ Index has been down for 6 months in a row, signaling falling demand in the country’s manufacturing sector.

Chinese authorities are looking to transform the country’s economic model away from being exports-driven to one more oriented towards domestic consumer spending, but the shift is proving to be challenging.

The Chinese economy, which is a major driver of global expansion and the 2nd largest in the world, grew by only 6.9% in 2015, its slowest rate in 25 years.

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