China’s economic woes send shockwaves through Asia’s stock markets and weigh heavily on the yuan, marking a significant setback for the world’s second-largest economy. Factory activity figures released on Wednesday provide fresh evidence of a faltering recovery, exacerbating concerns about global growth prospects.
Reflecting this downward trend, MSCI’s broadest index of Asia-Pacific shares, excluding Japan, plummeted by 1.2%, contributing to a cumulative 2.5% decline over the past month. The diminishing expectations of a resurgent China leading the global economic revival have now evaporated. Additionally, Hong Kong stocks have experienced a sharp drop of 20% since their peak in January.
The latest data reveals a substantial contraction in China’s manufacturing activity, with the May Purchasing Managers’ Index (PMI) plunging to 48.2, surpassing already pessimistic projections. Simultaneously, the growth in services sector activity slowed to a four-month low. These disheartening statistics have dealt a blow to investor confidence.
As a result, the yuan tumbled by 0.3% against the dollar, reaching a six-month low at 7.1090. This level was last witnessed during the period when China implemented stringent public health restrictions in November of the previous year. Notably, the yuan has endured a monthly decline of more than 2.6%, largely due to various economic indicators, such as output, industrial profits, retail sales, and loan growth, consistently falling short of expectations.
Carol Kong, an economist and currency strategist at the Commonwealth Bank of Australia (OTC:CMWAY), expressed concerns that China’s robust economic rebound could potentially complicate the efforts of advanced economy central banks in curbing inflation.
Contrary to initial expectations, the disappointment stemming from China’s economic struggles has had a ripple effect on other assets sensitive to Chinese market dynamics. The Australian dollar slumped to a nearly seven-month low of $0.6489, marking a fourth consecutive month of decline. Likewise, Australian stocks are bracing for their worst performance since March, with a projected monthly drop of 2.7%. The anticipated tourism-led rally in Thailand’s baht and stock index has also failed to materialize.
China’s blue-chip stocks experienced a significant drop of 1%, reaching their lowest point in 2023, leading to a rally in government bonds. Furthermore, Hong Kong’s Hang Seng index plummeted by 2.5%, now standing over 20% below its peak in January when hopes were high for a reopening-driven rally.
Even Japan, considered one of Asia’s brightest markets, was not spared from the downturn. On Wednesday, the benchmark Nikkei index fell by 1.6%. However, it is worth noting that this decline follows an impressive monthly gain of 6.8%, propelling the index to its highest levels in over three decades.
Aside from the developments in China, investors remain attuned to inflation concerns and the impending U.S. debt ceiling issue. Later on Wednesday, Germany’s inflation figures are expected to reveal a significant moderation, contrasting with less optimistic signals emanating from Asia.
Data from Australia caught market participants off guard, as consumer prices unexpectedly rose, prompting the country’s central bank to issue a warning of impending challenges. Consequently, traders have raised the likelihood of another rate hike in Australia next week.
Bank of Japan (BOJ) Governor Kazuo Ueda remarked on Wednesday that it may be challenging to dismiss the notion of entering a new normal, characterized by interest rates and inflation levels that do not return to their previous lows.
A deal to suspend the U.S. debt limit and avoid a default cleared a House of Representatives committee overnight, with debate and passage in the Senate scheduled for Wednesday, potentially extending into the weekend. While treasuries initially
