Workers walk past machinery in the mineral selection shop at the Dongguashan Copper Mine, operated by Tongling Nonferrous Metals Group Co., in Tongling, Anhui province, China. (Photographer: Qilai Shen/Bloomberg)

China Manufacturing Shows Resilience Amid Trade War, Slowdown

(Bloomberg) -- The first official gauge of China’s economy in 2019 showed a slowdown in the manufacturing sector eased off a little in January, though uncertainty over the future of trade with the U.S. remains a headwind.

The official manufacturing purchasing managers index came in at 49.5 in January from 49.4 in December, remaining below the 50 mark that signifies contraction. A gauge of new export orders also improved slightly, while a measure of activity in services and construction showed robust expansion, improving for a second month.

The data will offer some comfort to policy makers who’ve been rolling out targeted stimulus measures since last year in a bit to control the slowdown as trade officials face off with their U.S. counterparts in Washington this week. It wasn’t all good news though: things got tougher for smaller manufacturers and employment conditions worsened.

China Manufacturing Shows Resilience Amid Trade War, Slowdown

“Official support has likely lifted sentiment a little, although it remains negative”, said Jeff Ng, Asia chief economist for Continuum Economics in Singapore. “We believe services sectors will remain a large supporter of China growth, as manufacturing suffers from trade-related volatility.”

Bloomberg’s China Early Indicator series published this week indicated an eighth month of slowing activity, based on business conditions and market sentiment indicators.

January’s data should be read with reference to the approaching Spring Festival holiday, which falls in early February and likely caused manufacturers to bring some production forward ahead of the closure. As such, the slight relief may be temporary, according to Nie Wen, an economist at Huabao Trust Ltd. in Shanghai.

“January PMI was lifted by the front-loading of production before the Spring Festival and a relatively big issuance of municipal bonds and corporate bonds, both of which helped maintain demand,” he said. “The rebound will be a short-lived one.”

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Growth of China’s $13 trillion economy is expected to slow to around 6.2 percent this year, a sharp drop from 2018’s pace, which was already the weakest since 1990. Confidence has been hit as credit tightened last year in the course of a government financial cleanup and as U.S. President Donald Trump hit the nation with higher tariffs on its exports.

Chinese and U.S. officials meet in Washington this week for what the White House describes as "very, very important" talks. The current truce ends in early March, and the uncertainty about trade policy after that may also be weighing on export demand.

What Our Economists Say...

“In the next couple of months, the policy would be focused on implementation, given the need to assess the impact of existing measures and an absence of hard data available on activities for January. Improving lending conditions for smaller firms and bolstering sentiment are crucial aspects of the policy effort.”
-- Chang Shu and David Qu, Bloomberg Economics

The loss of pace in China is reverberating around the global economy. From Hong Kong to Japan, exports data for December showed a marked downturn as supply-chain disruptions triggered by U.S.-China tensions and a cyclical slowdown in the world economy, led by China, hit the trade-reliant region. Japan’s factory output dropped again in December, data released Thursday showed.

Smaller manufacturers continued to struggle, even though the government and central bank have announced a raft of measures to help them get access to capital. Small manufacturers have seen production contracting for four straight months.

China Manufacturing Shows Resilience Amid Trade War, Slowdown

Also of concern to policy makers will be signs of pressure in the job market. The employment sub-gauge in the report deteriorated to 47.8 and has been below the 50 mark for the past 22 months.

©2019 Bloomberg L.P.