China’s Jan factory activity at 3-year low; services PMI falls

FXStreet (Mumbai) - China’s economy has had a slow start to 2016. The official PMI for January came at 49.4, lower than December’s reading of 49.7 and below the forecast figure of 49.6. Manufacturing activity contracted at its fastest pace since August 2012. Official non-manufacturing PMI released today also showed a drop in China's services sector activity in January. Non-manufacturing PMI in January dropped to 53.5 from 54.4. The PMI figures once again have indicated the slowing of the world’s second largest economy and has raised the need for additional stimulus.

The drop in PMI for the sixth consecutive month can be attributed to factors such as falling prices and overcapacity in important sectors. Zhou Hao, an economist at Commerzbank said via Reuters "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”. He warned that China’s capacity reduction drive will likely further add ‘downward pressure’ on commodity prices.

The fall in services PMI is also a cause of concern for the policy makers as China attempts to move towards consumer led growth model. The services sector has been a frowth driver for China in 2015 and analysts will want to watch if the sector manages to maintain its growth momentum.

The Markit/Caixin PMI also showed a drop in factory activity. However, the Caixin PMI figures were higher than December's reading. Markit/Caixin PMI stood at 48.4, higher than the estimated figure 48.0, and also above the December figure of 48.2. Both the official as well as the Markit/Caixin survey revealed a decline in domestic as well as export demand. Companies continues to lay off people.

China's economic growth dropped to 6.9 percent in 2015, growing at a slowest pace in 25 years. Policy makers have pledged to achieve 6.5 per cent growth in 2016. Ding Shuang, head of Greater China Economic Research at Standard Chartered bank is of the opinion that "To maintain growth above 6.5 percent this year the economy will need more policy support”. Economists broadly expect the central bank to remain accomodative.
The statements provided by central bank in recent times have indicated the PBoC’s reluctance in introducing more easing measures like a RRR cut or an interest rate cut.
However, the weak fundamentals will build up the easing pressure on policy makers who are concerned about the impact of outflow of capital reserves on the yuan. They will have to restore the confidence of of investors who are left jittery after the plunge in stock markets seen in early January.