China manufacturing index falls to over 6 year low in September

Chinese factory activity shrank at its fastest pace in six and a half years in September, data showed Wednesday, the latest in a litany of bad news undermining hopes of an uptick in the world`s second-largest economy.

The news sent Chinese stock markets down and will come as a further worry to global investors already fretting about the spillover effects of China`s slowdown.

It also comes a day after the Asian Development Bank became the latest international body to lower its growth forecasts for China, a key driver of the global economy.

Preliminary figures from financial publisher Caixin`s closely watched Purchasing Managers` Index (PMI) showed manufacturing had slowed for the seventh consecutive month.

The details do "not bode well for future production" said economists at Nomura. "Demand -- especially external demand -- remains sluggish."

China is the world`s biggest trader in goods, whose manufactured items sell worldwide, so lower demand for its products is a telling sign of the state of global economic health.

Slowing production lines need less from commodity-supplying countries, meaning a knock-on effect for economies around the world.

Chinese authorities are trying to rebalance the economy -- which accounts for one out of every eight dollars of worldwide GDP -- from one reliant on exports and heavy government investment in infrastructure to one where domestic consumption is the main driver.

But weak data in the current quarter has raised alarm bells over how rapidly the old economy is slowing and whether the new one is expanding fast enough to take up the slack.

The Caixin PMI is closely watched by investors around the world for clues on China`s economic health as it is the first regular statistic to be announced for each month.

The preliminary figure of 47.0 was the seventh consecutive month of contraction and the worst since March 2009, in the depths of the global financial crisis.

It was below August`s result and also missed economists` forecasts according to Bloomberg News.

A result below 50 indicates the manufacturing sector is shrinking, while anything above shows expansion.

He Fan, chief economist at Caixin Insight Group, which released the data, said the decline showed manufacturing industry had "reached a crucial stage in the structural transformation process".

In a statement accompanying the PMI figures, he blamed the weakness mainly on sluggish external demand for Chinese goods and lower export prices.

The benchmark Shanghai Composite Index ended down more than two percent on Wednesday after the PMI figures, while other Asian markets also sank.China`s economy expanded 7.3 percent last year, the weakest pace since 1990, and slowed further to 7.0 percent in each of the first two quarters this year.

The government has cut interest rates five times since November as part of efforts to shore up growth.

It also lowered the Chinese currency`s central rate against the US dollar by nearly five percent in a week, which should make Chinese goods cheaper overseas.

The finance ministry earlier this month also vowed to adopt "stronger" fiscal policies.

But authorities` aggressive intervention to try to shore up share prices as a bubble burst on China`s own stock exchanges has raised questions over their economic management and commitment to market reforms.

Capital Economics analyst Julian Evans-Pritchard said current pessimism about China was "overdone".

The country still faces "structural drags" on growth including a continued slowdown in property construction, he said.

But key leading indicators such as fiscal spending and credit growth were showing positive signs.

"We continue to expect a cyclical recovery in economic activity over the coming quarters," he wrote in a note.