China’s factory gauge slipped in January

In Photo: Smoke billows from some factories in China.

China’s official factory gauge missed estimates, falling to an eight-month low in January as a financial cleanup moderated output at home and a stronger yuan trimmed export demand.

The manufacturing purchasing managers index (PMI) slipped to 51.3, compared with a 51.6 forecast in Bloomberg’s economist survey and 51.6 the prior month. The nonmanufacturing PMI rose to the highest since September at 55.3, from 55 in December. Numbers above 50 indicate improving conditions

A new composite index covering both services and manufacturing was released for the first time; it stood at 54.6, the National Bureau of Statistics said on Wednesday.

While early economic indicators signal a solid start for this year, policies to purge pollution and excessive borrowing may weigh on growth in coming months, testing policy-makers’ resolve.

In addition, heightened trade tensions with the United States also loom as a headwind with President Donald J. Trump again referring to China and Russia as “rivals” in his first State of the Union address on Tuesday.

“The lower manufacturing PMI is likely a result of China’s deleveraging drive, and it will decline further in the coming months as officials continue to control debt growth,” said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc. in Hong Kong. “But it won’t likely drop below 50 anytime soon due to strong external demand. Nonmanufacturing PMI will remain stable, providing a boost to overall economic expansion.”

“Growth momentum is steady, though with some warning signs as export orders fall and the industrial reflation cycle turns down,” Tom Orlik, Bloomberg chief Asia economist in Beijing, wrote in a report. “The basic picture of growth at a steady, if unspectacular, pace remains unchanged.”

The timing of the Lunar New Year holiday, during which factories and offices tend to shut down for weeks, often distorts national economic data for the first two months of the year and new export orders typically decline in January. This year’s break runs from February 15 to 21, later than last year.

Readings for small, medium and large companies all decreased, with small enterprises falling to 48.5.

A gauge of new export orders dropped the most since 2012, pushing it below 50 for the first time since October 2016. The reading for input prices fell to a six-month low. Stocks of finished goods increased to the highest level since April.

The stronger yuan is pressuring exporters, which took a toll on the new orders index, said the China Logistics Information Center, which helps compile the PMI survey, in a statement on their web site.

“Fluctuations in exports have dragged down manufacturing activity significantly,” said Chen Zhongtao, an analyst at the center, adding that the economy will stabilize as factories accelerate production from March.

Trade tensions are rising between the world’s two biggest economies with the US already slapping tariffs on solar panels and washing machines. Trump has about three months to decide whether to impose tariffs on imported steel and aluminum, while his top trade official is probing China’s intellectual-property practices.

Outside of manufacturing, activity was a little brighter. The nonmanufacturing PMI rose for a third consecutive month and exceeded expectations. A services sector subindex offset weaker construction activity, said Julian Evans-Pritchard, a China economist at Capital Economics Ltd. in Singapore.

“China’s manufacturing sector is taking a breather at the start of the year,” said Frederic Neumann, cohead of Asian economics research at HSBC Holdings Plc. in Hong Kong. “Services, on the other hand, are on a roll, reflecting soaring consumer optimism in China. This is more evidence of a gradual rebalancing away from manufacturing toward services and consumption.”

 

 

Image credits: Bloomberg

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