Manufacturing Activity Slips in China


BEIJING--A disappointing performance from China's factories in recent weeks shows the country's manufacturing sector could weigh on a broader economy already facing challenges.

The data released Thursday--which showed an unexpected shrinking of China's factory activity so far this month--isn't normally so closely scrutinized. But it comes as economists look for signs of whether growth in the world's No. 2 economy will continue the slowdown it showed in the fourth quarter of last year.

China's manufacturing sector faces still-sluggish demand from traditional markets such as the U.S. and Europe, currency-market moves that make its products less competitive overseas and rising labor costs.

Xiang Xiaoyun, chief executive of Kaicheng Shoes Co., which exports to the U.S. and Europe from its factory in Guangdong, said her company finds itself struggling.

"The competition from low-end competitors is not that obvious," she said. "But the appreciating Chinese currency and the rising price of raw materials as well as labor costs are big headaches."

The preliminary HSBC Purchasing Managers' Index--released Thursday by HSBC Holdings PLC and financial data provider Markit--slipped to 49.6 in January from 50.5 in December, the first time it fell below 50 in six months. A figure below 50 compared with the previous month signals a contraction, while a figure above that level indicates growth.

Most analysts expected the number to be slightly over 50. "It was below market expectation and surprised many," said J.P. Morgan economist Haibin Zhu. "And the forward-looking data is worrisome."

The Australian dollar, which is sensitive to moves in the Chinese economy because Australia supplies much of its raw materials, weakened 1% against the U.S. dollar on Thursday. China-sensitive stock markets also fell, with Hong Kong's benchmark Hang Seng Index losing 1.5%.

New overall orders and new export orders fell, while inventory rose, Mr. Zhu said.

Some economist and exporters also warned against overreacting. The data are provisional, issued about a week before the final PMI reading and based on 85% to 90% of total responses to HSBC's monthly PMI survey.

Furthermore, data around the Lunar New Year--a major holiday in China--tend to be more volatile as factories shut down, workers return to their hometowns and government statisticians holster their calculators until after the holiday. The two-week holiday begins Jan. 31, but many workers head home before that.

"The first quarter will be a bit bumpy," said Willy Lin, managing director of Milo's Knitwear (International) Ltd., which produces apparel in the southern Chinese manufacturing hub of Dongguan. "But overall, consumer buying power is improving, the U.S. housing market is a little better. So eventually the numbers could be better."

Mr. Lin pointed to other modestly positive signs, such as initial success getting customers to pay early. Many more customers are paying within 30 days, compared with 120 to 180 days in previous months, he said. Many businesses in China complained about sluggish payments last year when economic growth slowed.

Over the long term, China is seeking to rely less on exports as well as investment in big projects such as highways and property developments, and more on consumer activity. But a slowdown in manufacturing could hurt the government's goal of sustaining employment.

The HSBC preliminary PMI index, also known as the flash PMI, tends to survey more small and midsize companies relative to the official measure of factory output, due out on Feb. 1, that focuses more on larger state enterprises.

Other data have also been pointing to less-robust manufacturing conditions. In the final month of last year, industrial output slipped to 9.7% from 10% in November.

Chinese exporters could be further pressed this year if China's currency, the yuan, continues to appreciate. A stronger yuan makes Chinese-made goods less competitive when translated into other currencies. Last year the yuan rose 7% against the dollar.

--Liyan Qi contributed to this article.

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