As stocks slide, China's factories gear down

As stocks continue to slide in China, slowing production by the nation's factories could stoke fears that its economy is faltering.

The Caixin purchasing managers' index for July declined to a two-year low and indicated an outright drop in manufacturing, according to data released by Markit, a provider of financial information.

"China will have several hard questions asked of it over the week, feeding into the concern it's facing a hard landing," said IG market strategist Evan Lucas in a report.

The report suggests weakness was concentrated in private and smaller companies, with demand for new orders softening both within China and abroad. The reduction in manufacturing was the sharpest since January 0f 2012.

China's economy has been buffeted by a massive correction in the country's overheated stock market. Beginning in June, the Shanghai Composite Index fell more than 30 percent in a matter of weeks after surging roughly 150 percent from late 2014.

Although authorities in China sought to stem the decline by supplying liquidity to financial markets, the turmoil continued last week when the Shanghai index suffered its biggest daily fall in more than eight years. It dipped further today, falling 1.1 percent to 3,622.91, while Hong Kong's Hang Seng fell 0.9 percent to 24,411.42.

The slide comes as China's gross domestic product, which for years was into double-digits, has declined to around 7 percent. The stock market plunge seems to be affecting consumers, with retail sales falling in recent months.

Julian Evans-Pritchard, an economist with Capital Economics, thinks the volatility in stocks is contributing to a sense that business conditions are worsening in China. But he also expects the Chinese economy to recover, noting that the slowdown in factory output was partly caused by tropical storms that affected key manufacturing hubs. The Chinese government is also likely to take steps to support growth.

"We still think policy support will ensure that real economic activity holds up over the coming months," he said in a note.