January PMIs remain in contraction zone

Beijing

THE purchasing manufacturers' index (PMI) started the year on a weak note in China, with both the official and Caixin index still in negative territory last month, as the manufacturing sector continued to restructure amid a sluggish global environment.

The official PMI published by the National Bureau of Statistics fell for the sixth consecutive month to 49.4, slightly below expectations on the back of weak external and domestic demand.

A score below 50 indicates a contraction in the sector; one above 50 points to an expansion.

Meanwhile, the PMI published by Caixin, which is more representative of small firms than the official figure, picked up slightly last month. It rose to 48.4 from 48.2 in December, with input prices and new orders showing less contraction and a sign that part of the economy was bottoming out.

China's economy grew its slowest pace in 25 years last year; the world's second largest economy is faced with the task of restructuring its massive manufacturing sector while averting a strong slowdown, which would affect its trading partners and create instability at home.

This has meant cutting over-capacity in industries such as steel, cement and glass - which were once the engines of the county's double-digit growth.

Furthermore, the government is struggling to keep its foreign exchange rate stable as the country is facing huge capital outflows.

Li Gang Liu and Louis Lam of ANZ Research wrote in a report yesterday: "China's manufacturing sector will likely face a tough year ahead on the back of over-capacity, weakening global demand and government plans to tackle pollution."

The government aims to weed out outdated industries through its long-term restructuring drive. This push is expected to benefit the services sector, which last year overtook manufacturing as the engine of growth.

But while still performing strongly, the official non-manufacturing PMI fell to 53.5 from December's 54.4, a sign the slowdown is now embracing the entire economy.

A breakdown of the indices shows that in both PMIs, employment fell as companies laid off workers and were less willing to take on new ones. Even China's two internet giants Alibaba and Baidu announced late last year that they were freezing all hiring of fresh graduates.

HSBC economist Julia Wang said: "Risks to growth likely remain on the downside, with overseas demand falling and employment still weakening."

The new orders sub-index in the official index fell to 49.5 from 50.2 in December.

The government has so far reacted by cutting interest and reserve requirement ratio rates, and by injecting cash into the money markets. Analysts expect more easing down the road, following the release of the data yesterday.

Ms Wang said: "The data suggests that deflationary pressures are persisting in the manufacturing sector and will continue to weigh on overall economic growth. We forecast a more aggressive policy response, with a greater emphasis on fiscal policy in the coming month."

China is to announce its growth target for this year during its annual parliamentary session next month. Analysts expect the target to be lowered to 6.5 per cent from last year's 7 per cent.

Markets, which have been volatile since the summer, closed lower on Monday; the Hong Kong market lost 0.45 per cent and the Shanghai one, 1.78 per cent. In January alone, the Shanghai stock exchange fell by 23 per cent, its worst month since the global financial crisis.

Nonetheless, analysts warn that economic data published during the first quarter is regularly distorted by the Chinese New Year holiday, which falls in the second week of February this year.

READ MORE: Global factories parched for demand, need stimulus