China's manufacturing contraction persists, posing challenges for economic recovery in 2024

China's manufacturing sector faced its fourth consecutive month of contraction in January, according to an official factory survey released on Wednesday.

The official Purchasing Managers' Index (PMI) inched up to 49.2 from December's 49.0, indicating ongoing challenges for the world's second-largest economy as it strives to regain momentum in the new year.

The data, in line with a Reuters poll forecast, provides a critical snapshot of China's economic health after a somewhat shaky post-COVID recovery.

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Zhiwei Zhang, Chief Economist at Pinpoint Asset Management, remarked, "Economic momentum remained muted as the deflationary pressure persists," predicting a central bank rate cut in the first half of the year to stimulate domestic demand.

Despite a slight rise in output, the manufacturing PMI remains below the 50-mark, signifying a contraction. The figures for new orders and new export orders sub-indices, at 49.0 and 47.2, respectively, further highlight the industry's struggle.

Weak external demand and the impending Lunar New Year, which prompts earlier factory closures, contribute to the challenges.

To address economic headwinds, China's central bank recently announced a surprise cut to banks' reserve requirement ratio.

Julian Evans-Pritchard, Head of China Economics at Capital Economics, remarked on the uncertain nature of the PMI rise, stating, "Either way, it adds to evidence that growth momentum in China is in the midst of a renewed recovery, albeit one that remains on shaky foundations."

In contrast to the manufacturing sector, China's non-manufacturing PMI, which includes services and construction, experienced a modest uptick to 50.7 from December's 50.4.

While the services sub-index returned to growth after two months of contraction, the construction PMI grew at a slower pace. The composite PMI, incorporating both manufacturing and services, reached a four-month high of 50.9 in January.

This improvement raises questions about the sustainability of China's economic recovery and the impact of current policy support.

The International Monetary Fund (IMF) revised China's growth forecast for 2024 to 4.6 per cent, citing fiscal support and a less severe-than-expected property sector slowdown.

Beijing, expected to maintain a growth target around 5 per cent, is yet to release its official 2024 target.

(With inputs from Reuters)