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China January factory activity shrinks for second month in a row as orders fall

Chinese national flags are flying near a steel factory in Wu'an, Hebei province, China, February 23, 2017. REUTERS/Thomas Peter/Files

BEIJING (Reuters) - Activity in China's vast manufacturing 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 its trading partners after a string of sales warnings from heavy machinery producer Caterpillar to iPhone maker Apple.

Even with 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, according to data from the National Bureau of Statistics (NBS) on Thursday.

While analysts had expected a small dip, the change was marginal and the reading remained near three-year lows. The 50-mark separates growth from contraction on a monthly basis.

"The overall prosperity of companies continued to be weak, indicating that downward pressure on the economy persists," said Yang Yewei, a Beijing-based analyst at Southwest securities.

Despite increased policy support, the gloomy findings suggest the Chinese economy got off to a rough 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 trade talks. Chinese and U.S. officials are meeting in Washington 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. nL1N1ZU0KW]

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 ahead. The sub-index fell to 49.6 from 49.7 in December, the second consecutive month in contraction territory and reflecting persistently weak demand at home and abroad.

The escalating trade dispute with the United States has disrupted China's supply chains and added pressure on manufacturers who were already facing faltering domestic demand. Electronics makers have been particularly hard hit amid Washington's push for greater intellectual property protection.

New export orders shrank for a eighth straight month, though the sub-index ticked up slightly to 46.9 from 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 labour 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.


GLOBAL SLOWDOWN

Many analysts say even a durable trade deal with the U.S. would be no panacea for China's exporters, noting demand has been weakening in other parts of the world, too, most notably in Europe.


The International Monetary Fund last week cut its world growth forecasts and said failure to resolve protectionism could further destabilise the slowing global economy.

It kept its China forecast at 6.2 percent for 2019, but warned it could miss expectations if trade tensions drag on, even with Beijing's efforts to boost spending and bank lending.

Some analysts believe Chinese growth could even dip below 6 percent in the first half -- from 6.4 percent in the fourth quarter -- before stabilising later in the year.


SUPPORT MEASURES

One bright note in Thursday's data was an acceleration in non-manufacturing activity for the second straight month, reflecting some pockets of strength.


The services sector accounts for over half of China's economy, but consumer demand and confidence have been slackening recently. While the wholesale, transport and financial services sectors were more robust, the construction sector expanded at a slower pace in January.

So far, China has fast-tracked infrastructure projects, cut taxes and pumped liquidity into the financial system to help keep cash-starved firms afloat. It has also been guiding down borrowing costs.

But with profits under pressure and growing idle capacity, many factory owners are in no mood to make the new investments that policymakers need to engineer a sustainable turnaround.

The PMI survey showed small and mid-sized manufacturers continue to bear the brunt of the broader slowdown, suggesting that funds being earmarked for such companies are not flowing into the private sector, which provides a third of China's jobs.

Larger companies, which tend to be state owned and banks' preferred customers, saw a modest pick-up in growth last month.

Investors are closely watching to see if Beijing unveils more fiscal stimulus during the upcoming parliamentary meeting, including bigger tax cuts.

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.

"In the short term, the economy may stabilize slowly due to fiscal policy strength. But the downward trend will not change." Southwest Securities' Yang said.


(Reporting by Lusha Zhang, Yawen Chen and Ryan Woo; Editing by Kim Coghill)