China's factories off to a slow start

Markit/HSBC PMI reading for January shows first contraction in six months as strains mount

PUBLISHED : Friday, 24 January, 2014, 2:19am
UPDATED : Friday, 24 January, 2014, 2:19am

Activity in the mainland's factory sector contracted this month for the first time in six months, a preliminary survey showed yesterday, pointing to a weak start for the economy this year as policymakers seek to curb high debt levels to head off financial risks.

Weighed down by weaker domestic and export demand, the flash Markit/HSBC Purchasing Managers' Index fell to 49.6 in January from December's final reading of 50.5, dropping below the 50 line that separates expansion of activity from contraction.

The data is the first indication of sentiment in the 56.9 trillion yuan (HK$72.3 trillion) economy for the new year.

"Such a reading highlights the deteriorating growth outlook as policymakers are tightening their monetary stance, pushing through with an austerity campaign, and withdrawing stimulus measures," said Dariusz Kowalczyk, a senior economist and strategist for Credit Agricole CIB in Hong Kong.

"The reading points to a further slowdown in manufacturing and the entire economy in Q214. We maintain our below-consensus forecast for 2014 GDP growth of 7.2 per cent."

This implies softening growth momentum for manufacturing sectors

The Australian dollar dropped to a session low of 88 US cents from around 88.38 US cents just before the data. China is Australia's single biggest export market.

The Shanghai Composite Index fell 0.47 per cent 2,042.18 points and the Hang Seng Index dropped 1.5 per cent to 22,733.9 points yesterday.

Rising money market rates and bond yields since the middle of last year indicate the central bank is committed to deleveraging in the economy to fend off potential risks, but it has so far refrained from tightening policy abruptly.

"The marginal contraction of January's headline HSBC flash China manufacturing PMI was mainly dragged by cooling domestic demand conditions," said Qu Hongbin, chief economist for China at HSBC.

"This implies softening growth momentum for manufacturing sectors, which has already weighed on employment growth.

"As inflation is not a concern, the policy focus should tilt towards supporting growth to avoid repeating growth deceleration seen in the first half of 2013."

The flash PMI showed a faster rate of decrease in new export orders and employment in January. The new orders index came in at 49.8, the first contraction in six months.

PMI surveys at the end of last year had confirmed slowing momentum, with the HSBC/Markit one showing a three-month low and the government's official PMI at a four-month low. Both cited weak new export orders as one of the main reasons for the dip.

Some analysts said the holiday may have influenced the activity figures, but others were more cautious. "There are no strong seasonal factors in January - sentiment has increased in every January over the past five years," Kowalczyk said.

"There is, theoretically, a possibility of a Lunar New Year effect, but even in 2012, when the holiday also fell in January, the HSBC PMI rose.

"Hence, we assume that the weakening of mood is cyclical and reflects underlying weakening of growth momentum."