China’s Economic Pulse: Factory Activity Slows Amidst Lunar New Year

China’s Factory Activity Takes an Unexpected Hit in January

As the Lunar New Year approaches, China’s factory activity has unexpectedly contracted, reversing the growth momentum seen over the past three months. According to the National Bureau of Statistics, the official purchasing managers’ index (PMI) for January came in at 49.1, falling short of Reuters poll estimates of 50.1.

Seasonal Slowdown Ahead of Lunar New Year

The manufacturing PMI in January tends to be softer due to the seasonal slowdown, as migrant workers return to their hometowns ahead of the Chinese New Year, which falls on January 29. This annual phenomenon contributes to the contraction in factory activity, says Hui Shan, chief China economist at Goldman Sachs.

Non-Manufacturing PMI Also Sees a Decline

China’s non-manufacturing PMI, which measures services and construction activity, fell to 50.2 in January, compared to 52.2 in the preceding month. This decline suggests that the services sector is also feeling the effects of the seasonal slowdown.

Industrial Profits See a Boost

On a more positive note, China’s industrial profits jumped 11% in December from a year earlier, marking the first growth since July. This increase is a welcome sign, as corporate profits have been recovering from a sharp 27% year-on-year plunge in September.

Recovery from Pandemic-Related Slump

The recovery in industrial profits is a significant indicator of the financial health of factories, utilities, and mines in China. After a steep drop during the Covid-19 pandemic, corporate profits have been slowly recovering, with a 7.3% year-on-year decline in November and a 10% decline in October.

Full-Year Industrial Profits See a Decline

Despite the recent growth, the full-year industrial profits in 2024 fell 3.3% from the previous year, extending declines to a third consecutive year. This decline highlights the ongoing challenges faced by China’s industrial sector.

Economic Growth Targets Met

Despite the challenges, China’s economy met its official annual growth target last year, expanding 5.0%. This growth was driven by a barrage of stimulus measures, which helped to offset the weakness in domestic demand.

Supply-Side Strength vs. Weak Domestic Demand

Economists have pointed to the industrial output growth outpacing retail sales, underscoring China’s supply-side strength while domestic demand remains weak. This imbalance highlights the need for policymakers to address the underlying issues affecting consumer demand.

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