An employee walks past vehicle parts sitting in racks at the Xpeng Motors Technology Ltd. prototype center in Guangzhou, China. (Photographer: Giulia Marchi/Bloomberg)

China Slowdown Continues With Factory Gauge at Lowest Level Since 2016

(Bloomberg) -- China heads into the new year with its factories back in contractionary territory as the threat of a prolonged trade war dampens sentiment and stimulus struggles to gain traction.

The manufacturing purchasing managers index dropped to 49.4 in December, the weakest since early 2016 and below the 50 level that denotes contraction. Measures of new orders and new export orders slipped -- a bearish signal for future demand -- while readings for input and output prices weakened.

China Slowdown Continues With Factory Gauge at Lowest Level Since 2016

"The slowdown will continue into the next year," said Larry Hu, a Hong Kong-based economist at Macquarie Securities Ltd. "The weak PMI could result in more government stimulus to shore up the economy."

There was some good news as the non-manufacturing PMI rose to 53.8 from 53.4. That suggests recent stimulus efforts may already be starting to have some effect.

"Services is increasingly a bigger part of the economy, so that holding up is a counter to the weaker manufacturing, but to maintain the pace of growth, more stimulus will be needed," said Patrick Bennett, head of macro strategy for Asia at Canadian Imperial Bank of Commerce in Hong Kong.

Much now rides on trade. The U.S. agreed to postpone a tariff hike on $200 billion of imports from China until March 1 as both sides try to strike a deal over issues such as the alleged theft of intellectual property and technology, trade barriers, and the trade deficit.

What Our Economists Say...


“The next few months will be crucial to the Chinese economy’s direction and policy focus. Signs of domestic demand bottoming have yet to emerge. External pressures may accumulate, with exports possibly slowing as the front-loading effect wanes.”

--Chang Shu and David Qu, Bloomberg Economics. Read the full REACT

President Donald Trump reported “big progress” in trade talks with his Chinese counterpart Xi Jinping, providing an optimistic start to what could be a make-or-break year for ties between the world’s largest economies. The two presidents spoke at length by telephone Saturday, with each expressing satisfaction with trade talks initiated after their meeting earlier this month in Argentina.

Zhou Hao, an economist with Commerzbank AG in Singapore, said corporate sentiment in China has been hit hard by the trade war, which is one reason officials in Beijing are pushing for a deal.

"It is very difficult to lay out long term projects at this moment," he said.

The weak PMI result was foreshadowed by Bloomberg’s reading of early indicators for December and comes after official data showed the slowdown deepening in November, with industrial production growth the weakest in a decade and industrial profits falling for the first time in almost three years.

China Slowdown Continues With Factory Gauge at Lowest Level Since 2016

Ding Shuang, Greater China and North Asia chief economist at Standard Chartered Plc, noted the weak export orders suggest deteriorating external demand, which will likely prompt additional policy support from authorities, mostly on the fiscal side. Recent steps taken to support growth will start to gain traction soon, he said.

"The first quarter next year could be the low point as growth bottoms out," he said.

More government support, including looser monetary policy, more cuts in taxes and fees, and investment to upgrade manufacturing, are expected in 2019, according to the top government planning meeting this month.

Iris Pang, an analyst at ING Bank N.V. in Hong Kong, expects 4 trillion yuan ($582 billion) worth of stimulus in 2019 and another 4 trillion yuan in 2020.

"The key is not just the size, though, it is about the speed," she said.

©2019 Bloomberg L.P.