China factory contraction shows weak start for economy in 2014

Thursday 23 January 2014 15.00
Activity in China's manufacturing sector contracted in January for the first time in 6 months
Activity in China's manufacturing sector contracted in January for the first time in 6 months

Activity in China's factory sector contracted in January for the first time in six months, a preliminary survey showed today.

The data pointed to a weak start for the Chinese economy in 2014 as policymakers seek to curb high debtlevels to head off financial risks.              

Weighed down by weaker domestic and export demand, the flash Markit/HSBC Purchasing Managers' Index (PM) fell to 49.6 in January from December's final reading of 50.5, dropping below the 50 line which separates expansion of activity from contraction.
              
The data is the first indication of sentiment in the 56.9 trillion yuan ($9.4 trillion) economy, the world's second-largest, for the new year.

Rising money market rates and bond yields since the middle of last year indicate China's 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 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.
              
A Reuters visit to southern China's manufacturing heartlands this month showed many factories have closed earlier than usual for the upcoming Lunar New Year, the nation's biggest holiday, discouraged by weak orders and rising costs.
              
Some analysts said the holiday may have influenced the weak activity figures, but others were more cautious.

Chinese leaders have pledged to push reforms to unleash new growth drivers as the world's second-largest economy loses steam, burdened by industrial overcapacity, piles of debt and soaring house prices.
              
That means reducing government intervention to allow market forces to have a bigger say in allocating resources, and promoting domestic consumption at the expense of investment and exports.
              
China's annual economic growth slowed to 7.7% in the fourth quarter of 2013 from 7.8% in the previous quarter, putting full-year growth at 7.7%, sightly ahead of the government's target of 7.5%.
              
While the economy narrowly missed expectations for full-year growth to fall to a 14-year low in 2013, some economists say a further cooldown will be inevitable this year as officials hunker down for difficult reforms.
              
Still, most economists believe the slowdown will be modest and expect 2014 full-year growth will be between 7-7.5%.
              
Sources with top think-tanks have said the government likely will stick with the 7.5% target this year, indicating the leadership is still keen to keep the economy on an even keel as they push reforms.
              
Premier Li Keqiang said in a written address to the World Economic Forum in Davos that China will continue to deepen reforms and maintain steady economic growth this year, and also take more forceful measures to boost employment.
              
The HSBC/Markit PMI is more weighted towards smaller and private companies than the official one, which contains more large and state-owned firms.
              
The final HSBC/Markit manufacturing PMI for January is due on January 30 and the official manufacturing PMI is set for release on February 1.