PMI data out in China today pointed to continued contraction in manufacturing activity at the start of 2016. The official manufacturing PMI was stuck below 50 for the sixth month in-a-row, while the private Caixin survey showed some signs of bottoming out.
The official manufacturing PMI index fell to 49.4 in January from 49.7 in December. The figure was below estimates of 49.6. A reading above 50 indicates a monthly expansion in activity. Export demand remained weak with new export orders declining to 46.9 from 47.5. Employment in the sector also continued to shrink but at a slower pace as the index rose to 47.8 from 47.4.
The non-manufacturing PMI didn’t provide much cheer either as output in all other industries rose at a slower pace, with the index falling to 53.5 from 54.4. There was a slowdown in both services and construction activity. The employment index for the non-manufacturing sector remained below 50 as businesses continued to reduce staff levels.
An increasingly dominant services sector has cushioned some of the impact from declining output and job losses in the manufacturing sector. But any signs of a slowdown in services could hit confidence in China’s economy even further.
There was some positive news from the alternate Caixin/Markit survey. The manufacturing PMI rose slightly to 48.4 in January from 48.2 in December, beating estimates of 48.0. Total new business fell at a slower pace during the month, raising hopes that the current slump may be starting to bottom out.
Weak overseas demand and widespread overcapacity among China’s manufacturers are likely to keep the pressure on struggling businesses. Reforms by the government to streamline “zombie” state-owned enterprises are also expected to impact output over the next year.
Chinese authorities have put the emphasis on supply-side reforms recently and there appears to be some resistance for further monetary policy easing. Capital outflows could be one of the concerns holding back the People’s Bank of China (PBOC) from making more aggressive cuts in interest rates and to the reserve requirement ratio. Instead, the PBOC is opting to inject cash into the banking system via reverse repo operations.
The Chinese yuan came under pressure after the disappointing data. The PBOC set a lower midpoint for the yuan on Monday at 6.5539 per dollar from Friday’s 6.5516 per dollar. The yuan had eased to 6.5781 per dollar in onshore trading by mid-European session, while the offshore yuan saw a sharper slide to 6.6061.
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