February 1, 2016 / 2:27 AM / 3 years ago

China January factory activity falls at fastest pace since 2012: official PMI

SHANGHAI (Reuters) - Activity in China’s manufacturing sector contracted at its fastest pace in almost three-and-a-half years in January, missing market expectations, an official survey showed on Monday.

Employees work at a production line inside an automobile factory in Hangzhou, Zhejiang Province, China, January 18, 2016. REUTERS/Stringer

The official Purchasing Managers’ Index (PMI) stood at 49.4 in January, compared with the previous month’s reading of 49.7 and below the 50-point mark that separates growth from contraction on a monthly basis. It is the weakest index reading since August 2012.

Analysts polled by Reuters predicted a reading of 49.6.

The PMI marks the sixth consecutive month of factory activity contraction, underlining a weak start for the year for a manufacturing complex under severe pressure from falling prices and overcapacity in key sectors including steel and energy.

“The electricity production remained sluggish and the crude steel output continued the weak trend in January, reflecting an ongoing deleveraging process in the industrial sectors,” said Zhou Hao, an economist at Commerzbank.

“In the meantime, China has started an aggressive capacity reduction in many sectors, which could add downward pressure on the bulk commodity prices over time.”

Meanwhile, the official non-manufacturing Purchasing Managers’ Index (PMI) fell to 53.5 from December’s 54.4, according to the National Bureau of Statistics (NBS). The services index remained in expansionary territory highlighting continuing strength that has helped China weather the sharp slowdown in manufacturing.

With manufacturing decelerating quickly, services have been a crucial source of growth and jobs for China over the past year, and analysts have been watching closely to see if the sector can maintain momentum in 2016.

However, as the first indication of economic sentiment in 2016, the headline PMI data for both sectors might be distorted by the week-long Lunar New Year break beginning this year on Feb. 7, analysts say.

China’s economic growth cooled to 6.9 percent in 2015, the slowest pace in 25 years, adding pressure to policymakers who are already struggling to restore the confidence of investors after a renewed plunge in stock markets and the yuan currency.

Manufacturing has been hit particularly hard by China’s faltering construction sector, which drives final demand for many industrial products.

The independent PMI survey compiled by Markit/Caixin, is due to be released later Monday morning.

The official PMI gives more weight to large state-owned firms, while the Markit PMI includes a larger balance of private companies, and analysts will be watching closely for better visibility on conditions among China’s private sector, where strong growth has helped offset weakening productivity among state-owned firms.

Reporting By Nathaniel Taplin; Editing by Pete Sweeney and Sam Holmes

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