The knock-on effects of China's weak manufacturing data

You don't need to be an equity investor or an economist to know that troubles in China have been sending shockwaves around the world's financial markets for the last few months.

There are serious concerns over the country's economic growth, and as a result share prices have been tumbling following a year-long rally.

This has prompted the government to introduce a number of trading restrictions, devalue the yuan and cut interest rates in an effort to restore confidence.

The knock-on effects have been felt worldwide in the form of falling commodity prices, plummeting share values and a general sense of worry over the likely impact of a weaker China.

A slight rebound in global share prices was experienced towards the end of last week, and it left many investors and market commentators wondering whether the worst of the crisis had passed.

But it was a temporary reprieve, as new data has emerged that has caused fresh worries over the underlying health of the Chinese economy.

The data

The data in question relates to a decline in China's manufacturing sector. Last month, activity fell at its fastest pace in three years, according to the country's official Purchasing Managers' Index (PMI).

A reading below 50 indicates a contraction, while a reading above 50 signifies expansion. In August it dropped to 49.7 – its lowest since August 2012.

This is concerning because China is one of the world's biggest manufacturing nations and a major importer of raw materials, so any slowdown in factory output is going to affect exporters globally.

The impact

Chinese share prices once again took a hit following the release of the manufacturing data, with the benchmark Shanghai Composite Index opening down more than four per cent.

Markets elsewhere around the world also plunged. In the UK, a sharp decline in mining stocks dragged the FTSE 100 three per cent lower on Tuesday September 1st, while indices in France and Germany also ended the day down.

In the United States, the S&P 500 was three per cent lower on Tuesday's close, and elsewhere in Asia stocks in Japan and Hong Kong took another tumble.

Oil prices were also hit by the data, falling sharply after three days of strong gains. Both Brent crude and US West Texas Intermediate fell by around eight per cent.

Is it serious?

Any signs of slowdown in the world's second-largest economy are bound to be concerning, but whether the panic that has gripped the world's financial markets in recent weeks is truly warranted is open to question.

Julian Evans-Pritchard, China economist at Capital Economics, believes the reaction to this latest data from China is overhyped, in part because the country's economy is "increasingly driven by service sector activity, which still appears healthy".

He also noted that much of the decline in manufacturing activity in August came from very large companies that have been affected by national efforts to tackle pollution. "The weakness should be temporary and there are good reasons to expect a rebound in coming months," he stated.

Others are less upbeat about the situation. The International Monetary Fund has issued a warning over China's apparent slowdown, insisting it poses a real threat to global economic growth.

Whether this turns out to be the case, or whether the world's markets will calm down in due course, remains to be seen.

For now, however, it makes sense for investors to keep a close eye on any news coming out of China, whether positive or negative, as the impacts of each new announcement or set of figures are being felt almost immediately, and no country is immune.

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