Chinese manufacturing expands in January, official PMI shows, pointing to economic stabilization

This is the real issue with China's economy
This is the real issue with China's economy

China's official manufacturing Purchasing Managers' Index (PMI) showed the industrial sector continued to expand in January and a tad faster than expected, as the mainland economy shows signs of stabilizing.

The manufacturing PMI came in at 51.3 in January, down a smidgen from 51.4 in December, but still better than a Reuters poll forecast of 51.2.

A reading above 50 indicates expansion, while a reading below signals contraction.

The official figures tend to focus on larger companies. The private China Caixin PMI, which focuses on smaller and medium-sized firms, is out Feb. 3. with markets in Chin a shout through Thursday to mark the Lunar New Year.

The official non-manufacturing PMI, which takes a reading on the services sector, rose to 54.6 in January from 54.5 in December.

Capital Economics' China economist Julian Evans-Pritchard said in a note on Wednesday that the manufacturing data was still quite strong, despite a slight decline, as it was only a tad off the two-year high of 51.7 touched in November.

"The breakdown suggests that an acceleration in service sector activity offset a slowdown in the construction sector, which has been hit by the cooling property market and a reduction in fiscal support," he said. "The upshot is that China's recent recovery appears to remain largely intact for now."

The Australian dollar slipped as low as $0.7560 after the data, compared with around $0.7576 before the release. China is a key market for Australia's commodity exports. The currency move, however, may also have been dictated by a slight uptick in the U.S. dollar.

Workers assemble televisions on the production line of Tianle Group Co., Ltd on July 3, 2012 in Shengzhou of Zhejiang Province, China.
Feng Li | Getty Images

While the manufacturing PMI data tend to be more closely watched, China's pivot toward domestic consumption and away from manufacturing- and investment-led growth means the service sector, which includes consumer industries such as real estate, retail and leisure, has become the majority of the mainland economy.

It is also a key barometer of consumption, which accounts for more than 50 percent of gross domestic product (GDP).

The figures likely signaled that China's economic growth was stabilizing. Concerns have persisted over the mainland economy's health, as private-sector debt has surged even as the amount of growth from additional debt has declined.

But the economy in recent months has received a fillip from a pickup in the property sector.

Andy Xie, an independent economist and former chief Asia-Pacific economist at Morgan Stanley, told CNBC's "Squawk Box" on Wednesday that China's economy "obviously" was quite strong.

"Since the middle of last year, the economy has experienced a very big recovery," Xie said, noting that electricity consumption had risen sharply.

But he added, "The issue is, is it healthy? And unfortunately that is not true because we see the currency is under pressure and the forex reserves are falling a lot and the government has to use controls to stop the outflow," he said. "I think China's problem is not growth, it's quality of growth."

In January, China reported that its foreign exchange reserves fell for a sixth straight month in December, declining by $41 billion for the month, to $3.011 trillion, the lowest since early 2011. Policymakers have shored capital controls in an effort to stem outflows.

That, along with a sharp rise in the dollar in the wake of Donald Trump's surprise U.S. presidential election win, has helped to pressure the Chinese currency, with the yuan falling to nearly eight year lows against the greenback, touching its weakest since at least January 2009, during the global financial crisis.

Tommy Xie, an economist at Singapore bank OCBC, pointed to signs in the data that the prices of raw materials remained high, something he expected to feed into the producer price index (PPI). He forecast a rise of as much as 7 percent in January.

In December, China's PPI climbed to a five-year high, rising 5.5 percent on-year, exiting years of deflation. Producer prices had slumped in recent years amid excess capacity in many industries and a slowdown in global growth. That also signaled not just likely stabilizing economic growth, but also a likely pick up in corporate profits.

China's gross domestic product (GDP) grew 6.8 percent on-year in the fourth quarter, slightly beating expectations and signaling growth was stabilizing. For the full year, China's economy grew 6.7 percent.

China's statistics bureau said last month that consumption accounted for 64.6 percent of GDP in 2016, while per capita consumption rose 8.9 percent on year to 17,111 yuan ($2,490).

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

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