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Purchasing Manager’s Index Paints a Bleak Picture of China

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As per a private survey on China’s manufacturing sector, factory activity contracted more-than-expected in January — confirming views that the world’s second-largest economy started the new year on negativity.

The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) reached at 48.3 in January — the second-consecutive month of contraction and the lowest rating since 2016. January’s reading was also weaker than the 49.5 that was expected by the analysts polled by Reuters, and the 49.7 reported in December.

A reading of the index above 50 indicates expansion, during a reading below that level signals contraction.

The Purchasing Managers’ Index (PMI) is a survey about the operating environment of the businesses. The data throws first-hand light into what’s happening in an economy, as the PMI is usually among the first major economic indicators released each month. Investors across the globe have been watching closely at various indicators of the World’s second largest economy as there have been signs of trouble and domestic headwinds after the on-going U.S. – China trade war started.

“Latest survey data signaled subdued overall operating conditions in the Chinese manufacturing sector at the start of 2019,” the statement by Caixin and IHS Markit said. “Softer demand conditions led companies to revise their production schedules; underlying data indicated that weakness largely stemmed from muted domestic demand.”

The Caixin PMI data usually follow the Chinese official manufacturing PMI data released by the National Bureau of Statistics. As per the official figures, PMI stands at 49.5 — higher than 49.3 expected by analysts in a Reuters poll and the 49.4 reported in the previous month.

However, the two PMI surveys depict different pictures as the two surveys include a different set of manufacturing companies in the study. Large businesses and state-owned enterprises are covered by a large proportion of responses in the official PMI, while the Caixin indicator consists of a mix of small- and medium-sized firms.

Chinese authorities have recently introduced adequate measures to support the economy in the past year, with a particular focus on helping to boost smaller firms. But Friday’s release of the Caixin measure indicated that the step taken by the Chinese Government seems to have not worked as expected, said Zhengsheng Zhong, director of macroeconomic analysis at CEBM Group, a subsidiary of Caixin.

“On the whole, countercyclical economic policy hasn’t had a significant effect,” Zhong said in a statement. “China is likely to launch more fiscal and monetary measures and speed up their implementation. Yet the stance of stabilizing leverage and strict regulation hasn’t changed, which means the weakening trend of China’s economy will continue.”

Jian Chang, Barclays’ chief China economist, said that the Chinese Government has to do more. She told CNBC’s “Street Signs” that Barclays is expecting a cut of 25 basis points by the Chinese Central bank twice this year — in the first and second quarters, respectively — to boost the economy further.

But such supportive monetary policy measures take time to show results, economists said. Economic growth in China is expected to remain weak in the first half of 2019 given both external and domestic challenges, Citi economists wrote in a Thursday note. As per the Government data, China’s growth slowed down to 6.6 percent, which is the lowest rate in the past 28 years.

China’s manufacturing sector is not the only one thing that is hurting. Other export-oriented countries such as Japan, South Korea, and Taiwan also reported weaker PMI numbers and weak factory outlook for 2019.

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