Production declines for third month in a row

The mainland's manufacturing activities may contract in January for the third straight month, according to data suggesting Beijing could implement more policies to stabilise economic growth.

The HSBC/Markit flash purchasing managers' index (PMI), a monthly indicator published before official data is released, stood at 48.8 in January, indicating contraction. A value higher than 50 indicates expansion.

The figure, however, showed a slight improvement from the PMI in December, which was 48.7, and put the indicator at a three-month high.

'This suggests a relatively weak growth momentum of manufacturing activities, despite the upside surprise of December industrial production growth due to the front-loaded production ahead of the early Chinese New Year,' HSBC's chief China economist Qu Hongbin and analyst Sun Junwei said in the report.

The sub-index for new export orders rebounded to 51.1 in January, ending the contraction, at 49.7, in December. However, total new orders still contracted despite climbing to a three-month high of 49.7 this month from 46.9 in December.

The surge in new orders failed to boost production, which decelerated at a faster pace to 47 in January, compared with 49.5 in December, the report said.

'This further slowdown of production is mainly because Chinese manufacturers deployed inventories of finished goods to cope with the improving but still falling new orders,' the analysts said.

On the positive side, growth momentum - measured by the new orders minus finished goods index - surged to 1.3 in January, compared with minus 4.4 and minus 4.1 in the last two months.

'The ongoing slowdown of investment and exports will add more headwind to growth in the coming months, likely dragging GDP growth to around 8 per cent year on year in the first quarter from 8.9 per cent in the final quarter of last year,' the analysts said in the report.

Apart from uncertain external demand, the report said sharper than expected deceleration in fixed-asset investment and declines in property sales and prices would affect growth momentum. This suggests demand is likely to remain relatively subdued for the coming months, piling pressure on manufacturers to reduce inventories, which in turn would weigh on output and employment growth.

'We expect more policy easing to stabilise growth and the next reserve ratio cut is likely to be delivered in the coming weeks,' the report said.

However, Goldman Sachs pointed out that such data is always subject to Lunar New Year distortions.

'A sub-50 per cent PMI reading does not imply manufacturing activities are contracting and it is more important to focus on the trend of the index, which is going up,' it said.

But it added that the data was broadly consistent with its view that sequential - month on month rather than year on year - activities growth had been accelerating since late last year on the back of domestic policy loosening and external demand.

20.3%

The mainland's exports rose this much in 2011 from 2010

-Mainland exports in 2011 were worth US$1.89 trillion