Chinese manufacturing growth slows to six-month low

Factory growth in China eased to a six-month low in January due to weak foreign and local demand, a government report showed today, signalling a slow start of the year for the worlds second biggest economy.

Chinas National Bureau of Statistics reported that the nations manufacturing Purchasing Managers Index slid to 50.5 in January, matching a projected decline and trailing Decembers reading of 51.0. The level of 50 represents a threshold separating expansion and contraction in the respective sector.

Analysts had raised concerns prior to the release of the report that the ongoing Lunar New Year holiday which began on January 31 probably slowed factory production. Chinas markets are closed for the holiday from January 31 to February 6.

The report showed that Chinese factories suffered weaker export orders and minor growth in new orders. A gauge of output fell to a four-month low of 53.0 in January, down from 53.9 a month earlier, while the new-orders sub-index plunged to a six-month low of 50.9, down from 52.0 in December. Export orders, which track demand from abroad, fell at a faster pace and slid to 49.3, the weakest level since July.

The statistics agencys data also suggested that jobs at factories shrank at a faster pace as well, with an employment sub-index dropping to 48.2, the slowest reading since February 2013.

Wang Tao, chief China economist at UBS AG in Hong Kong, commented, cited by Bloomberg: “The economy has lost some momentum. Credit growth slowed in the second half and that impact is being felt.”

Todays report echoed a private survey released earlier in the week, which also showed factory output in the worlds second-biggest economy slowed to a six-month low. The HSBC China Manufacturing PMI slid to 49.5 this month, underperforming expectations for a drop to 49.6 forecast by the flash reading and well below December’s 50.5.

This signaled the first deterioration in operating conditions in China’s manufacturing sector since July, while employment levels at Chinese manufacturers fell for the third consecutive month. Moreover, it was the quickest reduction of payroll numbers since March 2009. Production levels continued to increase in January, extending the current sequence of expansion to six months. However, the rate of growth eased to a marginal pace.

Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC, commented on the report: “A soft start to China’s manufacturing sectors in 2014 partly due to weaker new export orders and slower domestic business activities during January. Policy makers should pay attention to downside risks and preemptively fine-tune policy to steady the pace of growth if needed.”

HSBCs Purchasing Managers Index, based on responses from over 420 manufacturers, is weighted more toward smaller companies, while the government report is oriented more toward large and state-owned companies and comprises data received by 3 000 respondents.

Earlier in the month, China’s National Bureau of Statistics reported that the Asian nations industrial production grew by 9.7% on an annual basis in December, the slowest since July, trailing analysts’ expectations for a drop to 9.8% from November’s 10% advance.

Meanwhile, the Asian economy grew by 1.8% in the fourth quarter, the government agency reported, underperforming projections that expansion would ease to 2.0% after posting at 2.2% in the three months through September. China’s economy expanded by 7.7% in 2013, matching the median estimate of analysts surveyed by Bloomberg. This was also the same expansion rate as in 2012, which however was the slowest since 1999.

Ding Shuang, senior China economist at Citigroup Inc. in Hong Kong, commented for Bloomberg: “Growth may continue to slow in the next couple of quarters due to generally tighter credit conditions, amid government efforts to contain local government debt and regulate shadow banking. Today’s data suggest that a gradual deceleration of economic activity continued at the beginning of the year.”