China’s factory activity contracts as PMI falls below 50

In January 2025, China's factory activity faced an unexpected contraction, marking a shift from the expansion seen in the previous three months. The official purchasing managers' index (PMI) reported by the National Bureau of Statistics fell to 49.1, slipping below the critical 50 threshold that signifies activity expansion. This decline is attributed to seasonal factors as many workers traveled back to their hometowns in anticipation of the Lunar New Year celebrations. The Chinese New Year, set for January 29, 2025, typically leads to such economic distortions as millions take time off to spend with their families. In addition to the manufacturing PMI, the non-manufacturing PMI, which incorporates services and construction activity, also showed a decreasing trend, dropping to 50.2 in January from 52.2 in December. This decline highlights the slowdown within the broader non-manufacturing sector, which reflects economic activity outside of manufacturing industries. Analysts believe that the dual pressures of seasonal worker movements and underlying economic challenges contributed to the weakened performance in both indices, suggesting significant hurdles for the economy as it approaches the holiday season. Despite the disappointing PMI figures, there were positive developments in industrial profits as they surged 11% in December compared to the same month in the previous year. This marked the first increase in industrial profits since July 2024, indicating that although the manufacturing sector faced challenges, the overall health of industrial businesses showed signs of recovering after enduring a sharp profit decline in prior months due to the declining real estate market and consumer demand pressures. The increases in industrial profits following years of steep declines are seen as critical to gauging the economic resilience amidst ongoing structural adjustments in the economy. Economists exhibit cautious optimism regarding future industrial activity, suggesting that while the current data indicate an immediate contraction, sustained efforts by the government, including fiscal stimulus measures, have the potential to revive growth in subsequent months. However, the challenges of achieving a stable recovery persist, as highlighted by analysts citing the need for consistent support to balance the various economic pressures faced by the manufacturing and non-manufacturing sectors alike. As the transition from year to year is marked by significant movements in labor and manufacturing patterns, stakeholders in China’s economy will be closely monitoring indicators of growth as the year unfolds.