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On account of the coronavirus outbreak, China’s manufacturing output has plunged to record lows in February as several factories were shut down. Central banks across the globe are willing to take corrective measures to ensure financial stability.
The Chinese economic outlook is turning from bad to worse over the rising number of infected coronavirus cases, the Chinese stocks fell drastically. Last month, the Chinese government asked all companies and manufacturing units to shut down their operations to control the spread.
The outcome of this decision has been quite obvious! China’s manufacturing index for February has witnessed a sharp fall to a record low. The Markit/Caixin manufacturing Purchasing Managers’ Index (PMI) dropped to 40.3. This is much below the expectations of the 45.7 figure in the Reuters poll.
Last month in January, the PMI was at 51.1. This also shows that there’s a massive 20% drop in China’s entire manufacturing activity, just in a month’s time. The survey released by the National Bureau of Statistics on Saturday shows that the PMI dropped to as low as 35.7 in February. Commenting on these figures, Richard Yetsenga, chief economist at Australia and New Zealand Banking Group, said:
“China’s February manufacturing PMI at 35.7 is comparable to the sort of outcomes seen during the financial crisis. While businesses are restarting operations in China, the vast majority are operating well below capacity, and many restrictions on the movement of people remain”.
Markets Give Positive Reaction on Monday, Chinese Stocks As Well
Despite China’s manufacturing data taking a dive, the global markets surprisingly attempted a bounce back. After last week’s massive market crash, it looks like investors have shrugged off any additional concerns. Now they seem to be not so negative about Chinese stocks.
Both – the Shanghai composite index and the Shenzhen composite index gained over 3% on Monday. The Hang Seng Index of Hong Kong also advanced just below 1% before the final trading hours. Similarly, Japan’s Nikkei also recovered from its previous slip to close 0.95% higher today. South Korea’s KOSPI gained 0.78%. However, the Australian market continued to decline with the S&P/ASX 200 down 0.77% on Monday.
OCBC’s Vasu Menon told CNBC thinks that investors have moved beyond the bad news and this is the reason behind today’s bounce back. Menon added:
“Markets are saying that you know the bad news, the fallout in the markets might lead policymakers to launch stimulus and stimulus is seen as good news for the markets at least for the short-term.”
The poor PMI numbers can also force China’s central bank to step in and take corrective measures. As a result, Menon asks to maintain caution and not turn aggressive at this moment. He said:
“Will the kind of policy stimulus we’re talking about, in terms of monetary policy, take care of a virus problem? I’ll be cautious, I wouldn’t be too aggressive at this juncture.”
Bank of England Promises to Bring Stability
The Bank of England has joined hands with other central banks and vowed to stabilize the financial markets. Earlier today, London’s FTSE 100 index jumped 3% before retracing back below 1%.
A BoE spokesperson said that the bank is monitoring all the developments at this stage. Besides, it aims to take several cognitive measures by assessing the impact on the global economy and the UK’s financial systems. The spokesperson said:
“The Bank is working closely with HM Treasury and the FCA (Financial Conduct Authority) – as well as our international partners – to ensure all necessary steps are taken to protect financial and monetary stability.”
Similarly, Japan’s central bank has also ensured similar stability measures. In a statement, the Bank of Japan said:
“The BOJ will monitor developments carefully, and strive to stabilize markets and offer sufficient liquidity via market operations and asset purchases.”
“Overseas and domestic financial markets continue to make unstable movements due to heightening uncertainty over the impact on the economy from the spread of the coronavirus,” explained BOJ governor Haruhiko Kuroda.