China factory activity in December posts worst contraction in six months

China’s factory activity shrank in December to the lowest level in six months, fuelling expectations the government may have to act soon to add impetus to the economy.

The official manufacturing purchasing managers’ index (PMI) declined to 49, the National Bureau of Statistics said in a statement on Dec 31.

That was weaker than the median forecast of 49.6 by economists in a Bloomberg survey, and matched the reading seen in June.

A gauge of non-manufacturing activity rose to 50.4 from 50.2 in November, boosted by expansion in the construction sector as government-led infrastructure investment accelerated in recent months.

Services activity, however, remained in contraction with an underlying measure staying at 49.3.

Any reading above the 50 mark suggests an expansion from the previous month, while a figure below that denotes contraction.

The PMI figures provided more signs of weakness in China’s economic recovery in the final months of 2023.

They are also likely to add pressure on fiscal and monetary policymakers to act urgently, after leaders vowed to maintain a pro-growth stance in 2024.

“The weaker-than-expected PMI data showed growth momentum has declined further amid a low season and the cold weather,” said Australia and New Zealand Banking Group senior strategist Xing Zhaopeng.

“We can’t rule out the possibility that the central bank may cut rates in early January,” he said.

NBS analyst Zhao Qinghe said in a separate statement that “falling overseas orders coupled with insufficient effective domestic demand” was the biggest trouble reported by some companies in the official PMI survey.

The textile and non-metal mineral product sectors were unable to make use of their full capacity due to subdued demand, he added.

Weak demand and sluggish confidence has also been reflected in deepening consumer price deflation and shrinking imports.

The worst property downturn in modern China is expected to persist, which will further curb demand for goods from furniture to home appliances.

A sub-index for factories’ new orders fell to 48.7 as demand weakened, while a gauge measuring new export orders contracted to 45.8.

For non-manufacturing sectors, a gauge of construction activity climbed to 56.9 from 55 in November, according to the NBS.

Some analysts had expected construction momentum to remain robust as the government stepped up the effort to build more infrastructure projects with extra bond issuance. 

Some services industries, such as air transport, lodging, and household services, lost steam as consumers reduced travelling due to cold weather, according to NBS’ Mr Zhao. BLOOMBERG

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