Activity in China’s factory sector contracted this month for the first time in six months, a preliminary survey showed yesterday, pointing to a weak start for the economy this year as policymakers seek to curb high debt levels to head off financial risks.
Weighed down by weaker domestic and export demand, the flash Markit/HSBC purchasing managers’ index (PM) fell to 49.6 this month from last month’s final reading of 50.5, dropping below the 50 line which separates expansion of activity from contraction.
The data offer the first indication of sentiment in the 56.9 trillion yuan (US$9.4 trillion) economy for the new year.
“Such a reading highlights the deteriorating growth outlook as policymakers are tightening their monetary stance, pushing through with an austerity campaign, and withdrawing stimulus measures,” said Dariusz Kowalczyk, a senior economist and strategist for Credit Agricole CIB in Hong Kong.
“The reading points to a further slowdown in manufacturing and the entire economy in Q214,” he said.
Rising money market rates and bond yields since the middle of last year indicate China’s central bank is committed to deleveraging in the economy to fend off potential risks, but it has so far refrained from tightening policy abruptly.
“The marginal contraction of January’s headline HSBC flash China manufacturing PMI was mainly dragged by cooling domestic demand conditions,” HSBC chief economist for China Qu Hongbin (屈宏斌) said.
“This implies softening growth momentum for manufacturing sectors, which has already weighed on employment growth. As inflation is not a concern, the policy focus should tilt towards supporting growth to avoid repeating growth deceleration seen in 1H 2013,” Qu said.
The flash PMI showed a faster rate of decrease in new export orders and employment this month. The new orders index came in at 49.8, the first contraction in six months.
PMI surveys at the end of last year had confirmed slowing momentum, with the HSBC/Markit one showing a three-month low and the government’s official PMI at a four-month low. Both cited weak new export orders as one of the main reasons for the dip.
Some analysts said the holiday may have influenced the weak activity figures, but others were more cautious.
“There are no strong seasonal factors in January — sentiment has increased in every January over the past 5 years,” Kowalczyk said.
“There is, theoretically, a possibility of a Lunar New Year effect, but even in 2012, when the holiday also fell in January, the HSBC PMI rose. Hence, we assume that the weakening of mood is cyclical and reflects underlying weakening of growth momentum,” he said.
China’s annual economic growth slowed to 7.7 percent in the fourth quarter of last year from 7.8 percent in the previous quarter, putting full-year growth at 7.7 percent, slightly ahead of the government’s target of 7.5 percent.