China’s manufacturing activity unexpectedly contracted in January, marking the first decline since September and highlighting challenges to the nation’s economic recovery.
Official data released by the National Bureau of Statistics (NBS) on Monday showed the manufacturing Purchasing Managers’ Index (PMI) fell to 49.1, below the 50-mark that separates expansion from contraction and lower than forecasts of 50.1.
The NBS attributed the weaker manufacturing activity partly to the seasonal effects of the Lunar New Year, which begins on January 29. The holiday typically sees millions of workers leave cities for their hometowns, disrupting industrial production.
However, analysts noted broader challenges beyond the seasonal slowdown. Zhiwei Zhang, chief economist at Pinpoint Asset Management, suggested the decline in PMI may also reflect weaker external demand, as the new export orders sub-index dropped to its lowest level since March last year.
Adding to concerns, industrial profits fell 3.3% in 2024, marking the third consecutive annual decline despite an 11% year-on-year rebound in December. The measure, which tracks companies with annual revenues above RMB 20 million ($2.8 million), underscores the ongoing strain on Chinese manufacturers.
The slowdown in profits has been attributed to factors such as falling prices, a prolonged real estate crisis, and weak domestic demand. Analysts worry these structural headwinds, combined with new tariff threats from the United States, could further hinder economic recovery.
While China’s economy grew 5.4% in the fourth quarter of 2024, meeting the government’s annual target of 5%, the recovery has been uneven. Strong industrial output and exports have offset weaknesses in the retail and property sectors.
China’s trade surplus reached nearly $1 trillion last year, buoyed by exports supported by factory gate deflation and a weaker yuan. However, trade headwinds loom large, with US President Donald Trump threatening to impose a 10% punitive tariff on Chinese goods in early February.
China’s non-manufacturing PMI, which includes services and construction, also reflected slower growth in January. It fell to 50.2 from 52.2 in December, signaling deceleration in service sector activity, which had benefited from holiday-related travel demand. Construction activity, however, slipped into contraction at 49.3, reflecting reduced activity ahead of the festival.
Despite existing government measures to stimulate demand—such as expanding programs to subsidize purchases of household goods—analysts say more aggressive fiscal support is needed. Economists have urged policymakers to shift focus from industrial upgrades and infrastructure investment toward boosting household consumption, which remains under pressure.
President Xi Jinping has emphasized the need to revitalize domestic demand, but concrete steps beyond the trade-in program have been limited so far.
China’s economic outlook for 2025 remains clouded by uncertainty. While some analysts anticipate a post-holiday rebound, risks from US trade policies and weak domestic consumption could weigh on growth.
Goldman Sachs economist Hui Shan noted that while manufacturing PMI data tends to be softer in January, broader economic challenges persist.
“The bottom line is that we do need a large stimulus from the government to even have a chance to improve inflation and confidence,” she said.
The Financial Times, CNBC, Reuters, and Bloomberg contributed to this report.
