Activity in vast manufacturing of China sector shrank for the second straight month in January, pointing to further strains on the economy that could heighten risks to global growth. Anxiety about cooling demand in China is rippling through the world’s financial markets and weighing on other economies of Asia after a string of sales warnings from heavy machinery producer Caterpillar to iPhone maker Apple.
Even with increasing government efforts to spur activity, concerns are growing that China may be at risk of a sharper-than-expected slowdown if the trade war with the United States drags on.
The official Purchasing Managers’ Index (PMI) edged up to 49.5 in January from 49.4 in December, but the change was marginal and the reading was still below the 50-mark that separates growth from contraction on a monthly basis, according to data released by the National Bureau of Statistics (NBS) on Thursday. Analysts surveyed by Reuters had forecast the gauge would dip to 49.3.
The gloomy findings suggest the Chinese economy got off to a rocky start in the new year, as many analysts had predicted after GDP growth cooled to a 28-year low last year.
That could add a sense of urgency to current trade talks, as high-level Chinese and U.S. officials meet this week in a pivotal effort to hammer out a deal before an early March deadline that could usher in sharply higher U.S. tariffs.
The two-day talks in Washington, which began on Wednesday, and are expected to be tense. A breakdown of the factory PMI showed weakness came from falling new orders. Manufacturers also continued to cut jobs, a trend Beijing is closely watching as its weighs more support measures.
New orders — an indicator of future activity — pointed to further pressure in coming months. The sub-index fell to 49.6 from 49.7 in December, the second consecutive month in the contraction territory, amid persistently weak demand at home and abroad. New export orders shrank for a eighth straight month on faltering external demand, though the sub-index ticked up slightly to 46.9 from the previous month’s 46.6.
Despite weaker orders, the output sub-index edged up to 50.9 from 50.8. Veteran China watchers typically advise taking its data early in the year with a pinch of salt, suspecting the trends may be distorted by the timing of the Lunar New Year holidays.
Many firms scale back operations or close for long periods around the holidays, which begin on Feb. 4 this year. But workers, business owners and labor activists have told Reuters that companies are shutting earlier than usual as the trade war bites, with some likely to close for good.
Bleak data ahead of an annual meeting of parliament in March could raise the possibility that Beijing may speed up or intensify its stimulus efforts in 2019, after a slew of measures last year that analysts said were modest by Chinese standards.
Still, many analysts believe conditions in China are likely to get worse before they get better, as support policies will take time to work their way through the economy.
Some economists believe growth could even dip below 6 percent in the first half — from 6.4 percent in the fourth quarter — before stabilizing later in the year.
One bright note in data of Thursday was an acceleration in service sector activity for the second straight month, reflecting some pockets of strength in the economy despite worries about faltering consumer demand.