China's manufacturing sector spluttered its way into 2019

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  • Activity at Chinese factories continued to weaken in January, although the deterioration was not as bad as some had feared.
  • Both new orders and new export orders fell, pointing to weak demand both at home and abroad.
  • In contrast, activity across other sectors improved noticeably, helped in part by strength in construction.

Activity at Chinese factories continued to weaken in January, albeit the deterioration was not as bad as some had feared.

The government’s Manufacturing Purchasing Managers Index (PMI), released by China’s National Bureau of Statistics (NBS), rose to 49.5 in seasonally adjusted terms, a small improvement on 49.4 level reported in December.

This PMI measures perceived changes in activity levels across China’s manufacturing sector from one month to the next.

Anything above 50 signals that activity levels improved while a reading below suggests they’re deteriorating. The distance away from 50 indicates how quickly activity levels are expanding or contracting.

So at 49.5, the NBS measure suggests activity across the sector continued to weaken in January, but not as fast as December.

The result was ahead of market expectations for a further decline to 49.3.

By size of manufacturer, the PMI for large firms stood at 51.3, up from 50.1 in December. That indicates a faster improvement in activity compared to a month earlier. Many large firms are government owned and operated.

In contrast, small and medium-sized firms saw activity level deteriorate at a faster pace than a month earlier.

While activity levels continued to soften at Chinese factories, the news was better for its services sector, now the largest part of the Chinese economy.

The NBS non-manufacturing PMI rose to 54.7 from 53.8 in December, marking the fastest improvement in activity seen since September 2018.

“The non-manufacturing PMI came in better shape than expected, possibly because of a lift in the construction subindex,” said Kevin Xie, China Economist at the Commonwealth Bank.

“Chinese policymakers have accelerated approvals of infrastructure projects and local government bond issuance in January. These stimulus measures buoyed business expectation in the construction sector.”

Combined with the manufacturing PMI, the broader Composite PMI increased to 53.2 during the month, up 0.6 points from December.

Despite the noticeable improvement in service sector activity, Xie estimates that Chinese economic growth slowed further in January. In the December quarter last year, Chinese GDP expanded at the slowest annual pace since 1990.

He also notes that new orders placed at manufacturers also declined, pointing to a continued softening in demand.

“The contractionary readings of both new orders and new export orders sub-PMIs reflect soft demand in China and offshore.”

The new orders subindex — reflecting domestic demand — stood at 49.6, indicating that orders fell at faster pace than December. The new export orders subinded, at 46.9, also remained weak, declining for a seventh consecutive month.

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