China factory activity shrinks again as economy suffers from weak demand

BEIJING – China's factory activity shrank for a fourth straight month in January as new orders shrank, as weak demand continues to weigh on the economy ahead of the upcoming Lunar New Year holiday.

The official manufacturing purchasing managers' index hit 49.2 this month, the Bureau of National Statistics said in a Jan. 31 report — above December's reading but still below the 50 mark that separates expansion from contraction. The figure was slightly worse than economists had expected.

The non-manufacturing activity index, which measures the construction and services sectors, was 50.7 from last month and slightly better than economists' forecasts. A sub-index of services activity rose to 50.1, the first expansion since October, although growth in construction slowed to a three-month low.

„There is no signal of a turnaround here,” said Calvin Chia, emerging market strategist at NatWest Markets in Singapore. „Surprises are too small to change the bullish view already so ingrained in the outlook.”

Market reaction to PMIs was muted as the CSI 300 index edged lower in morning trade. A gauge of Hong Kong-listed Chinese stocks lost as much as 1.1 percent. Both indices are very close to erasing last week's gains, fueled by hopes of strong government support.

China's 10-year government bond yield fell to 2.43 percent. This is the lowest since 2002. The Australian dollar — which is risk-sensitive and seen as a proxy for China — fell 0.6 percent.

The world's second-largest economy is trying to regain momentum this year after the government introduced some stimulus. These include measures to unleash more long-term money for banks, tighten rules on lending to short-selling stocks and expand developer access to loans. Officials ramped up rhetoric last week in an attempt to stem a rout that wiped out about US$6 trillion (S$8 trillion) in stock markets.

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While still contracting, the slight rise in the manufacturing measure „suggests that there has been some improvement in the economy,” NBS analyst Zhao Qinghe said in a statement accompanying the PMI release. Mr Zhao pointed to some positive signs of overseas demand, with the sub-gauge of new export orders rising to 47.2 – the best reading in four months and still good.

The beginning of the year is usually a slow season for manufacturers before the Lunar New Year, a week-long holiday that takes place next month, during which factory activity comes to a standstill. Even so, the underperformance of the headline manufacturing gauge points to underlying weakness in the economy, according to Bruce Bong, chief economist at Jones Lang LaSalle.

„Seasonality alone cannot fully explain the slowdown in the manufacturing PMI,” he said. „Policy support is still needed to increase effective demand in society to maintain a sustainable recovery.”

Economists expect Beijing to announce a more ambitious growth target for 2024 when the National Assembly meets in March. The economy hit the government's official growth target of 5 percent last year, but maintaining a similar rate of expansion in 2024 may be challenging.

The basis of comparison will be higher, and the economy will not receive the benefit of the stimulus from the immediate release of post-pandemic demand. There are also major drags on growth as the real estate slump shows no signs of ending and prices continue to fall. Trade tensions with key partners over key exports, including electric cars, are intensifying, adding to the downside risks facing the economy. Bloomberg

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