Recap – China’s Manufacturing Sector Contracts in January, Economic Outlook Uncertain | Forexlive

China’s manufacturing sector unexpectedly contracted in January, with the official Purchasing Managers’ Index (PMI) dropping to 49.1 from 50.1 in December, marking its weakest performance since August. This decline, below the neutral 50-point threshold and missing market expectations, reinforces concerns about sluggish domestic demand and ongoing economic headwinds. While China achieved its 2024 growth target of around 5%, the expansion was uneven, heavily reliant on exports and industrial output, while retail sales remained weak, and unemployment stayed elevated.

The country’s economy remains highly dependent on exports, with a trade surplus nearing $1 trillion in 2024. Factors such as a weaker yuan and factory gate deflation helped make Chinese goods more competitive globally. However, domestically, falling prices have eroded corporate profits and reduced workers’ incomes.

The non-manufacturing sector also showed signs of slowing, with its PMI falling to 50.2 from 52.2 in December, reflecting weaker momentum in services and construction.

The composite PMI, which measures both manufacturing and services, also declined from 52.2 to 50.1, barely indicating expansion.

Policymakers have pledged further stimulus in 2025, but analysts fear continued emphasis on industrial upgrades and infrastructure over direct household support could exacerbate overcapacity, depress consumption, and intensify deflationary pressures. Beijing has reiterated its commitment to boosting domestic demand but has thus far introduced only limited measures, such as an expanded trade-in program subsidizing purchases of cars, appliances, and other consumer goods. Efforts to revive the struggling property sector also remain critical, as real estate plays a significant role in overall domestic demand and local government revenue.

External risks further complicate China’s economic outlook, with Trump still threatening to impose a 10% tariff.

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Still to come from China is the release of the private-sector Caixin PMI on January 31 will provide further insight into economic conditions, with analysts expecting a reading of 50.5.