Tough start to year for China

China’s factory sector unexpectedly shrank for the first time in nearly two and a half years in January and firms see more gloom ahead, an official survey showed yesterday, raising expectations that policymakers will take more action to forestall a sharper slowdown.

The official Purchasing Managers’ Index (PMI) fell to 49.8 in January, the National Bureau of Statistics said, a low last seen in September 2012 and a whisker below the 50-point level that separates growth from contraction on a monthly basis.

The December level was 50.1, and a Reuters poll saw a better result, 50.2, for January. Only one of 11 economists in the poll predicted a January contraction.

Most of the PMI indexes “showed a downward trend, indicating that current economic growth is still in a downtrend”, said Zhang Liqun, an economist at the Development Research Centre, a state think-tank.

Some economists said the January reading was especially downbeat as it suggested that factories did not enjoy a usual spike in business before China’s annual spring festival holiday, which falls in mid-February this year.

The poor January official PMI fueled bets that more monetary policy loosening was in store in the world’s second-largest economy.

“China still needs decent growth to add 100m new jobs this year, plus China is entering a rapid disinflation process,” ANZ economists said in a note to clients.

“We [think] the People’s Bank of China will cut the reserve requirement ratio by 50 basis points and the deposit rate by 25 basis points in the first quarter,” they said.

Marred by a housing slump, erratic growth in exports and a state-led slowdown in investment, China’s economy has steadily lost steam in the last year as growth sunk to a 24-year low of 7.4%. And the downturn has also broadened into the country’s burgeoning services sector.

A separate official services PMI, also released yesterday, showed growth in the sector cooled to a one-year low in January. The official non-manufacturing PMI fell to 53.7, the lowest level since January 2014, from December’s 54.1. Accounting for 48% of China’s $10.2trn economy last year, the services sector has weathered the growth downturn better than factories, partly because it depends less on foreign demand.