January figures in benchmark purchasing managers’ index are weaker than expected and mark a sixth straight month of contraction

This article is more than 4 years old

This article is more than 4 years old

Activity in China’s manufacturing sector contracted at its fastest pace in almost three-and-a-half years in January, missing market expectations, an official survey showed on Monday.

The official purchasing managers’ index (PMI) stood at 49.4 in January, compared with the previous month’s reading of 49.7 and below the 50-point mark that separates growth from contraction on a monthly basis. It is the weakest index reading since August 2012.

Analysts polled by Reuters predicted a reading of 49.6.

The PMI marks the sixth consecutive month of factory activity contraction, underlining a weak start for the year for a manufacturing complex under severe pressure from falling prices and overcapacity in key sectors including steel and energy.

China’s stock markets fell sharply with the CSI300 index of leading shares and the Shanghai Composite both off nearly 3% in late afternoon trade. There was better news elsewhere in Asia Pacific with Nikkei in Japan and the ASX/S&P 200 in Australia both swatting away the gloom to remain in positive territory.

The price of oil fell on the disappointing data, which was compounded by weak export figures from South Korea. Brent crude was trading at $35.54 per barrel, down 45 cents, or 1.25 percent, from the last close.

Zhou Hao, an economist at Commerzbank, said: “The electricity production remained sluggish and the crude steel output continued the weak trend in January, reflecting an ongoing deleveraging process in the industrial sectors.”



“In the meantime, China has started an aggressive capacity reduction in many sectors, which could add downward pressure on the bulk commodity prices over time.”

Meanwhile, the official non-manufacturing PMI fell to 53.5 from December’s 54.4, according to the National Bureau of Statistics (NBS). The services index remained in expansionary territory highlighting continuing strength that has helped China weather the sharp slowdown in manufacturing.

With manufacturing decelerating quickly, services have been a crucial source of growth and jobs for China over the past year, and analysts have been watching closely to see if the sector can maintain momentum in 2016.

Angus Nicholson of IG in Melbourne said: “It is quite concerning that the significant monetary and fiscal stimulus in 2015 has only managed to slow the rate of decline in China’s industrial activity.

“The first quarter of activity is always the weakest in China due to the seasonal disruption of Chinese new year, and there is the possibility of global markets reacting very negatively when the quarterly data starts filtering out in March and April.”

The China slowdown was underlined on Monday by figures showing that South Korea’s exports suffered their worst downturn in January since the depths of the global financial crisis in 2009.



The trade ministry in Seoul said sluggish demand from China helped exports to fall to a worse-than-expected 18.5% from a year earlier, extending December’s slump of 14.1% and marking the 13th straight month of declines.

Shipments to China, South Korea’s largest market, tumbled 21.5% on-year in January in their biggest drop since May 2009, and the trade ministry said export conditions were worsening.

Analysts said the grim data might force the Bank of Korea to ease policy once again, although few expect it to act at the next meeting scheduled for 16 February.



Lee Sang-jae, chief economist at Eugene Investment & Securities, said: “Export performance was poor due to a cooling global economy and declining prices for exports. It’s been like this since the fourth quarter and we’ll see this kind of low through March and April.”

“Shipments being this weak means a recovery in consumption is urgently needed. If you look at the economy as a whole, this might boost the need for policy easing.”