China Slowdown Continues With Factory Gauge Down to 2016 Level

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

The manufacturing purchasing managers index (PMI) dropped to 49.4 in December, the weakest since early 2016 and back below the 50 level that denotes contraction. A gauge of new orders for export, which gives an indication of future demand, was 46.6, down from 47.

There was some good news as the non-manufacturing PMI rose to 53.8 from 53.4. That suggests recent stimulus efforts may be starting to have some effect. But for the nation’s factories, it’s shaping as a rough start to 2019.

“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.”

Bloomberg’s wrap of China’s early indicators foreshadowed the downbeat factory reading.

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.

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.

The weak PMI result comes after 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. Yet there are some signs of stimulus starting to take effect, with fixed-asset investment rebounding and the surveyed jobless rate improving marginally.

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.

Contact editor Yang Ge (geyang@caixin.com)