On Monday, January 27th, the Chinese National Bureau of Statistics announced that the Purchasing Managers’ Index (PMI) for the manufacturing sector in January was 49.1. This not only fell short of market expectations but also ended three consecutive months of expansion, dropping into contraction territory and marking the weakest performance since August of last year.
In January, the official PMI for China dropped from 50.1 in December to 49.1, below the 50 mark that separates growth from contraction and also below the median forecast of 50.1 from a Reuters survey.
The PMI uses 50 as the dividing line: a reading above 50 indicates expansion in the economy, while a reading below 50 signifies contraction.
Sub-indices such as the production index and the new orders index both fell into contraction territory below 50. When categorized by enterprise size, PMI for large, medium, and small enterprises all dropped below 50.
Data showed that the new export orders index fell by 1.9 percentage points to 46.4%, reaching its lowest point since February last year, indicating a possible slowdown in export growth.
In addition to the slowdown in factory activities, including the service and construction sectors, China’s non-manufacturing PMI for January also fell below market expectations, dropping significantly from 52.2 in December to 50.2.
On Monday, another set of data released by the Chinese National Bureau of Statistics indicated that profits of industrial enterprises with annual revenues exceeding 20 million yuan fell by 3.3% in 2024. Over the past three years, profits of these enterprises have been declining annually.
The new data has increased pressure on the Chinese authorities, who are already grappling with a slowing real estate market, waning consumer confidence, deepening deflationary pressures, and the looming possibility of a resurgence in the US-China trade war.
President Donald Trump threatened to impose punitive tariffs of 10% on Chinese imports starting from February 1st to pressure the Chinese authorities to crack down on the trafficking of fentanyl precursors. This move highlights China’s high dependence on economic growth through exports.
Last year, China’s trade surplus reached nearly $1 trillion. Due to weak domestic demand, manufacturers have been looking to export their inventories overseas. Coupled with tightening monetary policies and a weakening yuan, Chinese goods have become more competitive in the global market, further boosting China’s export figures.
However, this has exacerbated global trade imbalances, leading to conflicts with major economies worldwide.
After taking inflation into account, China’s trade surplus last year far exceeded the levels reached in the past century by major exporting countries such as Germany, Japan, or the United States.
The influx of Chinese goods into global markets has sparked increasing criticism. Apart from the US, many industrialized and developing countries have implemented tariff policies to slow down the influx of Chinese goods.
Simultaneously, domestic prices in China have been continuously falling, leading to significant reductions in both business profits and labor income.
While the Chinese authorities had promised to introduce further stimulus measures in 2025, analysts believe that these measures will continue to focus on industrial upgrading and infrastructure construction rather than household consumption. This could further exacerbate overcapacity, weaken consumption, and increase deflationary pressures.
Although China has pledged to boost domestic demand, aside from introducing trade-in programs and expanding subsidies for automobiles, household appliances, and other goods, there have been no other effective policies implemented.
Zhiwei Zhang, Chief Economist at Pinpoint Asset Management, stated that one reason for the slowdown in the January manufacturing PMI data “may be the weakening external demand, as the new export orders index has dropped to its lowest level since March of last year.”