Caixin China manufacturing sector PMI drops below 50.0 point mark in December

Factory sector conditions in China weakened further at the end of 2018 with companies continuing to pare their headcount and to trim prices amid soft demand conditions, the results of one of the most widely-followed surveys revealed.

The Caixin IHS Markit Purchasing Managers' Index slipped from a reading of 50.2 for November to 49.7 in December (consensus: 50.1).

According to the survey compilers, the deterioration in the sector was only "slight" but they noted how Tuesday's reading marked the first drop in the PMI below the key 50.0 point threshhold - which denotes a contraction in overall activity - since May 2017.

Similarly, although the renewed fall in total orders was just "fractional", it was nevertheless the first time since June 2016 that they had shrunk.

New export business declined again, but at a slower rate than in November.

On the prices front, the rate of decrease in output prices accelerated in December in comparison to the month before, while the cost of inputs fell for the first time since May 2017 on the back of a weaker domestic commodities market and plummeting oil prices, Caixin and IHS Markit said.

"The fall in year-on-year growth of the producer price index is likely to accelerate," said Dr. Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group.

"In general, China's manufacturing sector faced weakening domestic demand and subdued external demand in December. Companies had a stronger intention to destock and prices of industrial products were declining, which could further drag on production. It is looking increasingly likely that the Chinese economy may come under greater downward pressure."

Commenting on the data, Pantheon Macroeconomics's Freya Beamish said the drop seen in the subindices for prices paid and prices charged pointed to a decline in the rate of gain in the country's producer price index from 2.7% for November to 1.1% last month.

"Overall, the report implies deteriorating demand, with production likely to reflect that in coming months. Leading indicators suggest that activity is unlikely to begin a recovery until the second half, and we reckon the PMI will stay broadly in contraction territory. Chinese New Year could cause erratic moves, though the index is supposedly corrected for it," Beamish added.

In reaction to the latest factory PMI data, the Shanghai Stock Exchange's Composite Index shed 1.15% to 2,465.29, yet the US dollar was down by 0.34% at 6.8549.