Manufacturing Shrinks for First Time in 19 Months: Caixin Survey

China’s manufacturing sector contracted in December for the first time in 19 months, signaling a renewed deterioration in manufacturers’ operating conditions amid weakening market demand, a Caixin survey showed Wednesday.

The Caixin China General Manufacturing Purchasing Managers’ Index (PMI), which gives an independent snapshot of operating conditions in the manufacturing sector, dipped to 49.7 in December from 50.2 the previous month. The reading marks the lowest level since May 2017, when the index stood at 49.6.

The Caixin index, one of the earliest available monthly indicators showing China’s latest economic conditions, is closely watched by investors. A reading of 50 divides expansion from contraction. The higher above 50 the faster the expansion, while the further below 50 the greater the contraction.

“It is looking increasingly likely that the Chinese economy may come under greater downward pressure,” said Zhong Zhengsheng, director of macroeconomic analysis at consultancy CEBM Group, a subsidiary of Caixin Insight Group.

Total new orders received by manufacturers decreased in December for the first time since June 2016, the survey found, with a number of respondents saying in open response questions that relatively subdued market conditions had hampered sales.

“Although the gauge for new export orders remained in contractionary territory, its reading rose marginally in December. That showed external demand remained subdued due to the trade frictions between China and the U.S., while domestic demand weakened more notably,” Zhong said.

The subindex for output rose to slightly above 50, still near its lowest level in three years. Zhong predicted that the drag of weak demand on production would gradually become more evident.

The subindex for suppliers’ delivery times rose above 50 in December for the first time since August 2016, suggesting an improvement in manufacturers’ cash flow, Zhong said. “This was probably due to recent government polices to support the financing needs of small and midsize companies.”

The employment subindex inched up but remained in contractionary territory due to companies’ efforts to reduce operating costs and decisions not to replace voluntary leavers, the survey said. Beijing has made its efforts by issuing a series of preferential policies to stabilize employment in early December, including cash rewards for companies that lay off zero or few workers.

“Business confidence was relatively subdued,” the survey said. The subindex for confidence towards the 12-month outlook for production edged up in December, but remained subdued.

China’s official manufacturing PMI, released by the National Bureau of Statistics on Monday, dipped to 49.4 in December from 50 the month before. The reading marks the lowest level in 34 months. Manufacturing accounts for roughly 30% of China’s gross domestic product.

The Caixin China General Services Business Activity Index for December, which tracks the growing services sector, will be released on Jan. 4.

Contact reporter Liu Jiefei (jiefeiliu@caixin.com)

Read more about Caixin’s economic indexes.