China manufacturing PMI unexpectedly retreats in December

Factory activity in Asia’s largest economy slowed down in December, mainly as a result of weakness overseas, but analysts pointed to improvements in local conditions as reasons for optimism.

Caixin’s ‘unofficial’ manufacturing sector purchasing managers’ index for December retreated from a reading of 48.6 for November to 48.2 in December.

The median estimate from analysts was for a reading of 48.9.

A drop in the output sub-index from 50.0 to 48.7 was the main culprit. However, another sub-index, tied to new export orders, registered a sharp fall, retreating from 51.6 to 47.8.

Nonetheless, the official manufacturing PMI – which was released on 1 January - registered a slight improvement, Julian Evans-Pritchard, china economist at Capital Economics pointed out.

In parallel, the official non-manufacturing PMI hit a 16-month high in December.

Evans-Pritchard also highlighted the recent improvement in Baidu’s index for small and medium-sized enterprises and improved business sentiment as per the latest tally from surveys by Market News International.

For Evans-Pritchard, the economy as a whole still appeared to be ‘turning a corner’ and the economy could be expected to continue improving, albeit with a lag, as economic stimulus measures continued to feed through.

Even should that not be the case, weak readings in the same period of last year meant that headline activity data should still show an improvement in coming months as they would be coming off a weak base.

“The combination of disappointing manufacturing PMI and a positive surprise in the non-manufacturing PMI highlights the on-going rebalancing of the Chinese economy from investment and export-led growth to more consumer-driven and service sector-driven growth,” chimed in analysts from Danske Bank.