China’s Manufacturing Activity Contracts in January

By Liz Lee and Joe Cash

BEIJING (Reuters) – China’s manufacturing activity unexpectedly contracted in January, an official factory survey showed on Monday. This marked the weakest performance since August, raising calls for stimulus in the world’s second-largest economy.

The official purchasing managers’ index (PMI) fell to 49.1 in January from 50.1 in December, crossing below the 50-mark that separates growth from contraction. This also missed the median forecast of 50.1 in a Reuters poll.

China’s $18 trillion economy achieved the government’s growth target of “around 5%” for 2024 in an unbalanced manner, where exports and industrial output significantly outpaced retail sales, with unemployment remaining high.

The threat from U.S. President Donald Trump to impose a 10% punitive duty on Chinese imports effective February 1, aiming to compel Beijing to crack down on fentanyl trafficking, may highlight China’s reliance on exports for growth.

China’s trade surplus nearly reached $1 trillion last year, as producers shifted stocks overseas to mitigate weak domestic demand. The country’s outbound shipments were bolstered by factory gate deflation and a weak yuan, making Chinese goods more competitive globally.

Conversely, falling prices impacted corporate profits and workers’ incomes significantly at home.

The non-manufacturing PMI, which includes services and construction, slowed to 50.2 from 52.2 in December.

Policymakers have vowed to implement additional stimulus by 2025, though analysts express concern that initiatives will primarily target industrial upgrades and infrastructure instead of households. This focus could exacerbate overcapacity in factories, diminish consumption, and intensify deflationary pressures.

Beijing has committed to revitalizing domestic demand but has provided minimal details aside from a recently-extended trade-in program that subsidizes purchases of cars, appliances, and other goods.

Chinese leaders hope that policy support measures introduced late last year will boost demand in the struggling property sector and alleviate developers’ financial issues, which heavily influence domestic demand and local government finances.

Encouraging Chinese consumer spending would mitigate producers’ vulnerability to Trump’s tariff threats, which he hinted could reach as high as 60% during his campaign.

Analysts surveyed by Reuters predict the private sector Caixin PMI to hold at 50.5, with data expected to be released on January 31.