China, Europe Manufacturing Weakens as Xi Visits U.S.

China and Europe are seeing lower manufacturing activity, with the sector declining in China and expanding weaker than expected in Europe.

According to the Caixin China purchasing managers’ index, demand for manufactured goods is shrinking. The PMI fell to 47, the lowest level in over six years. The Caixin PMI, which tracks small and mid-sized companies, is a crucial indicator of broader activity in the country, where small businesses are more susceptible to weakness in local aggregate demand.

Government Intervention, Analyst Downgrades

China and Europe are seeing lower manufacturing activity, with the sector declining in China and expanding weaker than expected in Europe.

According to the Caixin China purchasing managers’ index, demand for manufactured goods is shrinking. The PMI fell to 47, the lowest level in over six years. The Caixin PMI, which tracks small and mid-sized companies, is a crucial indicator of broader activity in the country, where small businesses are more susceptible to weakness in local aggregate demand.

Government Intervention, Analyst Downgrades

The weakness in China expects to catalyze further aggressive intervention from the Chinese government.  They have already lowered interest rates several times, worked to devalue the yuan, and ban short selling and insider selling of equities to prop up its collapsing stock market.

These moves have been controversial, and Caixin chief economist He Fan believes more intervention is necessary for the country’s economy to see a recovery.

“Fiscal expenditures surged in August, pointing to stronger government efforts on the fiscal policy front. Patience may be needed for policies designed to promote stabilization to demonstrate their effectiveness,” He said.

Even before the release of the news, analysts worldwide cut their growth expectations for China several times in the year. On Tuesday, the Asian Development Bank cut its growth estimate to 6.8%, short of the 7% target the Chinese government has set for the country. It also expects a deceleration to 6.7% in 2016. Investment banks are more bearish, with growth expectations below 6.6% at several firms.

Additionally, the ADB said the economic slowdown in China could have global implications, with more countries becoming reliant on Chinese growth and growing consumption in China. Both European luxury brands and a broad basket of American companies, particularly Yum Brands, Starbucks, Apple, and car manufacturers, have looked at China as a growth driver to replace maturing growth at home.

China’s leader Xi Jinping arrived in the United States this week and has already met with leaders of technology firms in the country. In a speech to executives and investors, Xi promised a more business-friendly investment environment in a signal that China is seeking more foreign direct investment in its economy.

European Weakness

That global impact may already be a factor in weakening indicators from Europe, where manufacturing fell to 53.9 in September, according to the Markit Eurozone Manufacturing PMI. Markit has seen a similar growth rate for manufacturing throughout 2015, despite an aggressive quantitative easing program directed at causing growth to accelerate.

Growth slowed in Germany and throughout the Eurozone, with manufacturing output prices falling for the first time in six months. That deflationary trend, if it continues, could argue for weaker demand throughout the Eurozone and reflect an inability to sell goods. Input prices also saw a steep decline, largely due to falling commodity costs.