China's manufacturing sector is going backwards as new orders tank

Feng Li/Getty Images
  • Activity levels at Chinese manufacturers weakened at the sharpest pace in nearly three years in January.
  • New orders slumped by the most since September 2015, driven by weak domestic demand.
  • New export orders, after declining in the second half of 2018, rose at the fastest pace in 10 months.
  • Along with the prospect of further stimulus from policymakers, that improvement in external demand helped push confidence to seven-month highs.

All was not well in China’s manufacturing sector in January.

Activity levels deteriorated at the fastest pace in years, and with new orders also tanking, there appears to be little prospect of a rebound in the short-term.

The IHS Markit China Manufacturing Purchasing Managers Index (PMI), produced in conjunction with the Caixin Insight Group, slumped to 48.3 in January in seasonally adjusted terms, leaving it at the lowest level since February 2016, another period when concerns about the health of the Chinese economy were elevated.

IHS Markit

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

This survey tends to focus on small to medium-sized firms whereas China’s official composite PMI, released by the government, captures responses from small, medium and large-scale manufacturers, including state-backed firms.

The results in the IHS Markit survey fit with those seen in the government PMI which reported that activity levels at small and medium-sized manufacturers deteriorated quite sharply in early 2019, masked by an improvement at larger firms.

“On the whole, countercyclical economic policy hasn’t had a significant effect,” said Zhengsheng Zhong, Director of Macroeconomic Analysis at Caixin Insight Group, referring to recent stimulus programs rolled out by Chinese policymakers.

“Output declined, indicating notable downward pressure on China’s economy.”

During the month, production levels fell, as did employee numbers. Inventories of raw materials and finished goods also declined while input and output costs grew at a slower pace.

Worryingly, new orders fell by the largest amount since September 2015, painting a bleak picture on the outlook for the sector.

However, in contrast to weakness in external demand, respondents said the decline on this occasion was driven internally.

“The subindex for new orders dipped further into contractionary territory, pointing to a moderate contraction in demand across the manufacturing sector,” Zhong said.

“Yet the gauge for new export orders rose notably above the 50 level, the dividing line that separates contraction from expansion, reaching its highest point since March 2018, showing that companies’ export orders have obviously rebounded since the truce in the China-US trade war.”

Despite the improvement in the external environment, Zhong expects the Chinese government will continue to roll out stimulus measures.

“China is likely to launch more fiscal and monetary measures and speed up their implementation. Yet the stance of stabilising leverage and strict regulation hasn’t changed, which means the weakening trend of China’s economy will continue,” he said.

Despite the gloomy operating environment in January, the improvement in offshore demand, coupled with the prospect of more stimulus, may explain why confidence among survey respondents rose to the highest level since May last year.

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