Asia: Stocks slump as weak Chinese manufacturing fuels slowdown fears

Asian stocks slumped on Tuesday after a contraction in Chinese manufacturing activity added to concerns about the nation’s flagging economy.

The Shanghai Composite Index finished down 1.22% while the Hang Seng dropped 2.24% and the Nikkei 225 plunged 3.84%.

The declines in Asia came as the official purchasing managers’ index for China manufacturing activity fell to 49.7 in August from the previous month’s reading of 50. A figure below 50 signals a contraction in the sector while a level above that indicates expansion.

The Caixin PMI was unexpectedly revised upwards to 47.3 in August from the previous estimate of 47.1 but the figure still revealed a contraction.

“Concerns about Chinese growth as well as the prospect of a US rate rise have seen European markets come off their worst monthly performance since 2011, though that does have to be tempered somewhat by last week’s strong rebound, as China cut rates further while senior Fed official and New York Fed President Robert Dudley suggested a September rate rise was now ‘less compelling’ than previously thought,” said Michael Hewson, chief market analyst at CMC Markets UK.

International Monetary Fund managing director Christine Lagarde on Tuesday warned at the University of Indonesia that the slowdown in Asia could impact growth in emerging markets.

Lagarde said the international economy was weaker than the IMF had estimated and that the recent spike in "global risk aversion and financial market volatility” could affect growth in Asia.

Meanwhile, Moody’s said most of China’s utility, infrastructure and non-property companies can withstand a 10% depreciation of the yuan.

Moody’s conducted a study which analysed 70 of its rated companies and found that most had sufficient financial cushion to cope with such a depreciation. The depreciation assumption includes the weakening that followed the 11 August change in the mechanism for determining the daily fixing rate of the yuan against the dollar.

Clement Wong, associate managing director at Moody’s said, "The 70 companies that we analysed held 48% of their debt in currencies other than yuan as of 31 December 2014, including offshore bonds and bank loans. Most of that debt was unhedged."

"Nonetheless, some of these companies generate revenues in US dollars. These revenues provide a natural hedge against interest expenses and principal amounts rising in renminbi terms," added fellow analyst Vivian Tsang.

"Other companies, particularly investment-grade ones, have strong liquidity positions, and low to moderate debt levels."