China’s official factory gauge signalled conditions deteriorated for a sixth month as an index of services continued to hold up, illustrating the widening divergence in the two-speed economy.
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The official PMI’s output sub-index fell 0.8 percentage points to 51.4 in January.
“China is the biggest story in global macro and a downside surprise would, we believe, swing global investor sentiment toward risk-off”, said Tim Condon, head of Asia research at ING, in a morning note.
However, demand from overseas has seen a steep decline as the rate of reduction in new export orders accelerated in January. However, the index is still below the 50 level that separates an expansion in manufacturing activity from a contraction and marks the 11th month in a row that the index has stayed in contractionary territory. Industries that enter the scheme in 2016 will pay 560 billion yuan ($85.17 billion) less in tax than they did in 2015, according to the country’s statistics bureau.
NBS statistician Zhao Qinghe attributed the retreat to slowing factory activity ahead of the Spring Festival, which falls in early February this year, as well as China’s ongoing campaign to resolve excessive capacity.
The rise in the figure suggests that the world’s second largest economy may be showing signs of some improvement in the new year, helped by a raft of measures taken by Beijing to prop up growth.
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Chinese Premier Li Keqiang said last week that the economy was still facing downward pressure, which is unlikely to disappear any time soon.
