China Manufacturing Still Weak, HSBC's PMI Shows -- Update

By Richard Silk 

BEIJING--China's manufacturing sector strengthened slightly at the start of the year, according to a measure released Friday, but remains in a weak spot.

A preliminary reading of the HSBC China Manufacturing Purchasing Managers Index rose to 49.8 in January from a final reading of 49.6 in December. A reading above 50 indicates expansion from the previous month, while a reading below 50 indicates contraction.

The overall growth of China's economy slowed to 7.4% in 2014, its slowest pace in more than 20 years, in part because of problems in manufacturing.

"Today's data suggest that the manufacturing slowdown is still ongoing amidst weak domestic demand," HSBC economist Hongbin Qu said in a statement accompanying the figures.

China's export sector has held up relatively well in recent months, partly thanks to a stronger U.S. economy. The country's exports increased 6% last year and new export orders continued to rise in January, according to the PMI, though more slowly than the month before. The weakness can instead be pinned on feeble sales within China.

Employment in the manufacturing sector also fell at a faster rate in January, the PMI showed, which is potentially a major worry for China's government. Chinese leaders have said they are comfortable with slowing growth as long as job creation continues apace. If that changes, they may move more aggressively to stimulate the economy.

"Employment is a lagging indicator, and the manufacturing sector has been in a soft state for quite a while," said Macquarie economist Larry Hu. "In 2015, China's labor market will have more problems."

Prices for both raw materials and finished products fell faster in January than the month before, the PMI said, part of a pattern of deflation that has become entrenched in China's industrial sector over the past three years.

Against this background of low inflation and weak growth, a consensus is growing that the government may ease monetary policy to boost growth this year.

"More monetary and fiscal easing measures will be needed to support growth in the coming months," said Mr. Qu.

The preliminary PMI figure, also called the HSBC Flash China PMI, is based on 85% to 90% of responses to HSBC's PMI survey each month, and is issued about one week before the final PMI reading.

China's government also produces a PMI. In recent months, it has performed slightly better than HSBC's, remaining just above the 50-level that separates expansion from contraction.

Write to Richard Silk at [e-mail]

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