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China factories output drops more than forecast

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February 2
12:21 AM 2016

Recording the steepest drop in over three years, China's manufacturing production further fell. The factory output for January 2016 missed the forecast. The benchmark Purchasing Managers' Index (PMI) fell to lowest in the three-and-a-half years. The discouraging China manufacturing numbers pushed oil prices lower.

The factories output in the world's second largest economy suffered drop for the sixth months in a row. The official Purchasing Managers' index touched 49.4 for January output from 49.7 in December 2015. The average forecast of 49.6 was made in a poll by analysts carried out by Reuters.

The PMI below 50-point mark indicates economy slowdown and any level above 50 indicates economy growth. Based on the January 2016 reading of 49.4, the PMI is hovering at lowest since August 2012. The latest reading of PMI underlines a poor start of 2016 year. The Chinese manufacturing sector is reeling under severe pressure from weaker prices and overcapacity in key sectors including steel and energy, according to The Guardian.

The oil price further eased as latest factory output data disappointed the market. The weak export numbers from South Korea have further worsened the business confidence. Brent crude fell 45 cents or 1.25 percent to $35.54 per barrel.

Zhou Hao, an economist at Commerzbank, said: "The electricity production remained sluggish and the crude steel output continued the weak trend in January, reflecting an ongoing deleveraging process in the industrial sectors."

China's gross domestic product (GDP) grew in 2015 at its slowest in 25 years. Despite efforts to lower borrowing costs for business, increasing fiscal spending and reducing bank reserves, the manufacturing sector couldn't pick up as it was anticipated, according to International Business Times. The output and new orders didn't show any major developments.

China has begun several initiatives to revive the economy. The Chinese government has started reducing capacity in several sectors of economy. The government is taking all possible measures to ease pressure on commodity prices.

According to National Bureau of Statistics (NBS), the official non-manufacturing PMI dropped to 53.5 in January 2016 from 54.4 in December 2015. The services index continued to be in expansionary territory highlighting the strength of China in services segment. The services segment is helping China weather the adverse conditions in the economy.

Caixin manufacturing PMI index, a private benchmark, recorded a marginal monthly increase from 48.2 to 48.4. However, it's still even further in slowdown mode than the official measure. Caixin majorly focuses on smaller firms than the National Bureau of Statistics figure which is predominantly by large state-owned enterprises, as per a report published by NEWS ax.

Analysts and economists hold view that several monetary and fiscal measures taken by Chinese government in 2015 were enough to only slow the rate of decline in Chinese industrial output. Angus Nicholson of IG in Melbourne said: "The first quarter of activity is always the weakest in China due to the seasonal disruption of Chinese New Year, and there is the possibility of global markets reacting very negatively when the quarterly data starts filtering out in March and April."

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