Economy

China's factory activity shrinks, first time in 6 months

Don't get your hopes up for a China growth pickup: HSBC
VIDEO3:2503:25
Don't get your hopes up for a China growth pickup: HSBC

China's manufacturing activity contracted for the first time in six months in January, a private survey showed on Thursday.

The flash Markit/HSBC Purchasing Managers' Index (PMI) fell to 49.6 in the month, compared with a final reading of 50.5 in December.

The reading came in much lower than a Reuters forecast of 50.3. A number below 50 signals contraction.

(Read more: What's next for China? Economists are split)

Analysts told CNBC the data, while possibly skewed, raised potential concerns for the world's second biggest economy.

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"There are probably some New Year distortions in here as it is right between the holidays, but it does suggest not all is well in China's economy. I wouldn't get my hopes up for a big, strong pick-up right after Chinese New Year," said Frederic Neumann, MD & Co-Head of Asian Economics Research at HSBC.

"Interest rates are rising in China, we know the government is pursuing aggressive reforms; a strong pick-up is not in the cards for China," he added.

(Read more: China's economygrows 7.7% in fourth quarter)

The reaction in the markets was swift: the Australian dollar dipped 0.5 percent against the greenback, while the Shanghai Composite widened its losses.

The PMI showed a faster rate of decrease in new export orders and employment in January. The new orders came in at 49.8, shrinking for the first time in six months.

HSBC's Neumann noted with concern that despite improving U.S. and European growth, exports in China just aren't responding like they have in the past.

"We have again, a contraction in new export orders. The trade flow just isn't ramping up as we're used to and that reflects in part a decline of competitiveness of China's economy and that trade is no longer a big driver for the Chinese manufacturing sector. It is increasingly domestic demand and that engine isn't firing either so China is really challenged on both fronts, he said."

Growth figures on Monday showed China's economy recording its slowest annual expansion rate since 1999, at 7.7 percent.

Chinese statistics tend to deviate around the Lunar New Year, which falls on January 31 this year, as factories tend to wind down ahead of the week-long holiday.

"We are reluctant to read too deeply into this number," Bill Adams, senior international economist for PNC Financial Services Group, wrote in a note. "The Chinese economy sometimes marches to the beat of its own drummer, but this month's dip in the HSBC flash China manufacturing PMI looks too far out of step with recent evidence of an improving global business cycle. "

"That said, slower credit growth and higher interest rates after December's annual work conference would make more moderate domestically-oriented growth in early 2014 unsurprising. In short? This release calls for caution -- but not angst," he added.

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