Caixin/Markit manufacturing index slump hints at downward pressure

A major private manufacturing Purchasing Managers' Index (PMI) for December slipped into contraction territory for the first time in 19 months, which is in line with the trend of an official survey and indicates a weakening economy.

Analysts said that downward pressure may continue to weigh on the Chinese economy this year, but the expected supportive policies will gradually take effect and lead to improvement in the economy in the second half of this year.

The Caixin/Markit PMI for manufacturing activity, released on Wednesday, stood at 49.7, compared with 50.2 in November, the first time it has slipped into contraction territory since May 2017.

On Monday, the National Bureau of Statistics released the manufacturing PMI for December, which was 49.4, down from 50 in November.

A reading above 50 indicates expansion while that below 50 indicates contraction.

"It is looking increasingly likely that the Chinese economy may come under greater downward pressure," said Zhong Zhengsheng, director of macroeconomic analysis at consultancy CEBM Group, a subsidiary of Caixin Insight Group.

New orders decreased in December, the first time since June 2016, according to the Caixin/Markit survey results. Respondents said low-level market demand had affected sales.

New export orders decreased for nine months in a row, although the decrease had narrowed compared with November.

Zhong said that the index tracking new export orders remained in the territory of contraction although it had risen marginally in December, showing that external demand remained inactive due to the country's trade frictions with the US as well as weakening domestic demand.

The index for manufacturing output rose slightly in December, but the growth remained weak compared with the start of 2018.

That for employment continued to fall in December, according to the survey results.

The index for confidence edged up to the highest level in three months in December, although it remained low compared with previous years.

The private survey results, together with the official PMI results, have made analysts more cautious regarding the prospects for China's economic growth this year.

"The downward pressure will continue," said Li Chao, an analyst at Huatai Securities. "The possibility is high that industrial growth-related data (in December) may have also weakened and the economy may face heavier downward pressure in the fourth quarter of 2018(data for the quarter are yet to be released) and the first quarter of this year."

He added that China's employment pressure may intensify in the coming months and there may be policy fine-tuning to stabilize the economy.

The Chinese economy may face a harsher situation this year and growth may edge down, said a research note by Ruida Futures. "But as the effect of the country's countercyclical supportive policies gradually becomes apparent, the situation may improve in the second half of this year."

At the annual Central Economic Work Conference last month, China's top leadership said the nation will boost support for the economy this year by cutting taxes and maintaining ample liquidity.

Economists expected the authorities to further ease monetary policies, such as cutting the reserve requirement ratio for banks (the ratio of cash banks are required to keep aside as reserves), to bolster the economy, with some of them predicting that these would come as early as this month.