China factory contraction shows weak start for economy in 2014

Jan 23 2014, 18:18 IST
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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. Reuters 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. Reuters
SummaryActivity in China's factory sector contracted in January for the first time in six months.

Activity in China's factory sector contracted in January for the first time in six months, a preliminary survey showed on Thursday, pointing to a weak start for the economy in 2014 as policymakers seek to curb high debt levels to head off financial risks.

Weighed down by weaker domestic and export demand, the flash Markit/HSBC Purchasing Managers' Index (PMI) 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.

"Such a reading highlights the deteriorating growth outlook as policymakers are tightening their monetary stance, pushing through with an austerity campaign, and withdrawing stimulus measures," said Dariusz Kowalczyk, a senior economist and strategist for Credit Agricole CIB in Hong Kong.

"The reading points to a further slowdown in manufacturing and the entire economy in Q214. We maintain our below-consensus forecast for 2014 GDP growth of 7.2 percent."

The Australian dollar dropped to a session low of $0.8800 from around $0.8838 just before the data. China is Australia's single biggest export market. See.

Most Asian share markets extended early losses.

The CSI300 index of the largest Shanghai and Shenzhen A-share listings fell 0.32 percent, while Hong Kong shares tumbled 1.2 percent.

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 marginal contraction of January's headline HSBC flash China manufacturing PMI was mainly dragged by cooling domestic demand conditions," said Qu Hongbin, chief economist for China at HSBC.

"This implies softening growth momentum for manufacturing sectors, which has already weighed on employment growth. As inflation is not a concern, the policy focus should tilt towards supporting growth to avoid repeating growth deceleration seen in 1H 2013."

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

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