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New year brings old economic woes, as China fears flare

Shares on Wall Street plunged following sharp losses in China and Europe
Stocks fall on first day of 2016 trading 05:04

China's slowing growth, which walloped the global economy in 2015, is already inflicting punishment on the new year.

Mainland Chinese stocks fell 7 percent after the release of weaker-than-expected manufacturing data, with the benchmark Shanghai Composite Index recording its largest drop since August. The sharp decline halted trading for the day, triggering "circuit breakers" implemented last year to stop large investors from dumping shares during periods of intense market volatility.

U.S. stocks buckled in early trading following the downdraft in China. All three major domestic stock indexes were down, with the Dow Jones industrial average losing 420 points, or 2.4 percent, to 17,004; the S&P 500 sagging 48 points, or 2.4 percent, to 1,995; and the Nasdaq composite shedding 141 points, or 2.8 percent, to 4,877.

"Those are violent New Year fireworks. That's quite a way to start the day off," Andre Bakhos, managing director at Janlyn Capital told Reuters.

The Caixin/Markit index of purchasing managers fell to 48.2 in December from 48.6 in November, the seventh time in eight months that the index edged lower. The index uses a 100-point scale, with a reading above 50 signaling expansion in the manufacturing sector.

Though the reading was only marginally lower than in November, it was the first time that new orders from overseas had fallen since September. The drop in demand also produced further layoffs in the sector.

"This shows that the forces driving an economic recovery have encountered obstacles and the economy is facing a greater risk of weakening," He Fan, Caixin Insight Group's chief economist, told The Associated Press.

A separate survey by an official group released Friday found factory activity ticked up slightly from its lowest level in three years but was still contracting, according to AP.

A drop in Chinese stocks in mid-2015 also send shockwaves around global markets, raising concerns about weakening demand in the world's second-largest economy. Since then, new headwinds have cropped up that could depress growth in the U.S., including a move by the Federal Reserve to raise interest rates last month for the first time in nearly a decade and an ongoing slump in oil prices.

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Eurasia Group, a political risk consultancy, listed China as one of its top risks for 2016. China is both an important and uncertain driver in the global economy, unnerving partners that don't understand or agree with Chinese priorities.

"When China now flexes even the little finger of its economy, global markets will react," the report said.

Consumer demand remains soft around the world, underscoring the global economy's fragility. In the U.S., a key gauge of factory output fell last month to its weakest reading since June 2009, as the strong dollar dented exports.

Still, the continued pullback in manufacturing in China is in part by design. The Chinese government is acting to rebalance the country's economy away from manufacturing and investment toward consumption, like the U.S.

What's more, while China's factories may be slowing, "other indicators suggest that the economy as a whole likely held up reasonably well last month," said Julian Evans-Pritchard, China economist with Capital Economics, in a note.

China's overall economy appears to be turning a corner, Evans-Pritchard said, noting that other data, including Baidu's SME Index and business sentiment, showed improvement last month.

"[U]nless conditions deteriorate markedly over the course of the next couple of months as they did in early 2015, then a much weaker base for comparison will still mean that much of the headline activity data should improve over the coming months," he said.

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