China's smallest manufacturers had a disappointing start to 2017

Photo: STR / AFP / Getty Images

After improving at the fastest pace in four years in December, activity levels at smaller Chinese manufacturing firms cooled last month, according to new data released by IHS Markit on Friday.

The group’s manufacturing purchasing managers index (PMI), produced in conjunction with Caixin, fell 0.9 points to 51.0 in January, disappointing markets who had been expecting a smaller deceleration to 51.8.

The PMI measures changes in activity levels for small and medium-sized manufacturing firms. A figure of 50 is deemed neutral, with anything above that level signalling that activity levels improved from a month earlier. The distance from 50 — either above or below — indicates how quickly activity levels changed over the survey period.

At 51.0, it indicates that while activity levels improved, the rate of improvement was slower than that seen in December.

“Latest data signalled a further improvement in the health of China’s manufacturing sector at the start of 2017. However, the rate of improvement slowed since December, as output and new orders increased at weaker rates amid a further reduction in employment,” said Markit.

It also said that firms continued to reduce stock levels, with inventories of raw materials falling modestly after a slight increase in December. Stocks of finished goods also declined for the first time since June 2016.

However, it wasn’t all bad news, particularly if you’re of the view that the global economy is improving.

Helping to fuel that belief, Markit said that new export orders — a gauge of international demand for Chinese manufactured goods — grew at the fastest pace seen since September 2014 over the month.

Perhaps explaining why purchases of raw materials slowed, input costs continued to increase rapidly, albeit at a slightly slower pace than that seen in December, said Markit.

“As a result, companies raised their prices charged for the eleventh successive month,” said Markit. “Though solid, the rate of increase was the slowest seen in the past four months.”

So higher raw materials prices are being passed through to customers — fitting with a recent uptick in non-food inflation in China — although that may now be starting to impact end demand given the slowdown in new orders and production.

Despite the mixed report card on the sector, Markit said firms remained upbeat towards the 12-month outlook for production with the sentiment reaching a six-month high during the month.

However, that optimism wasn’t shared by everyone.

“The Chinese economy maintained stable growth in January. But the sub-indices showed that the current growth momentum may be hard to sustain. We must remain wary of downward pressures on the economy this year,” said Zhengsheng Zhong, director of macroeconomic analysis at Caixin Insight Group.

The Caixin-IHS Markit survey fits with the government’s official manufacturing PMI released earlier this week.

That report said activity levels for medium-sized firms were largely unchanged last month, while those for smaller firms deteriorated at a faster pace.

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