China's manufacturing data encounters mixed market reaction

(Alliance News) - Investors started 2024 on a positive note on Tuesday, after a slight expansion in manufacturing activity in China.

However, not all analysts were convinced that the slight expansion was enough to get China out of the mud.

The Caixin purchasing managers' index edged up to 50.8 points in December from 50.7 in November. Rising slightly higher above the 50-point no-change mark, it shows growth sped up slightly.

The reading came in slightly above the FXStreet-cited market consensus of 50.4.

"The slight uplift in the headline index was partly due to a stronger rise in new orders during December. Although modest, the latest increase in overall sales was the quickest recorded since February. Companies often mentioned that improved market conditions and greater client spending had supported the latest rise in new work. At the same time, the downturn in new foreign sales moderated in December," S&P Global explained.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: "There will be relief that authorities' efforts to stimulate demand appear to be starting to pay off domestically. The effect of falling inflation in key export markets is also likely to be behind this more optimistic outlook, with companies more confident to order."

However, AJ Bell's Investment Director Russ Mould was more sceptical about the figures, saying that China is a "tricky one for investors".

"A year ago, money piled into Chinese equities with the hope of companies benefiting from looser Covid restrictions and a reopening of the economy, yet the results were disappointing. Sentiment has waned and investors in general are reluctant to take advantage of share price weakness in the country and load up on Chinese stocks," Mould commented.

The Caixin reading paints a slightly more positive picture of China's factories than the official PMI data released on Sunday.

According to the National Bureau of Statistics, the manufacturing PMI fell to 49.0 in December from 49.4 in November, representing the third consecutive month of contraction. The PMI only edged into positive territory once in the past nine months.

"The divergence between the more downbeat official PMI and the Caixin measure was probably due to sample differences. The Caixin measure focuses more on export oriented firms and smaller private enterprises, light industries dotted around southern coastal regions, whereas the NBS gauge has a much broader coverage including [state-owned entreprises]. The more upbeat outturn from the Caixin measure is in line with recent export data, which showed an improvement from a low base, but the export outlook remains murky," explained Kelvin Lam, senior China+ economist at Pantheon Macroeconomics.

China began dismantling its draconian zero-Covid restrictions in December 2022 after almost three years, which allowed the economy to rebound. But that recovery has been hampered by weak consumer and business confidence, a persistent housing crisis, record youth unemployment, and a global slowdown which is weighing on demand for Chinese exports.

Unsurprisingly, the data from over the weekend has intensified calls for more stimulus from Chinese authorities to boost the economy.

SPI Asset Management Stephen Innes contends that China will need more than "just stimulating economic activity" and requires "fundamental reform of the underlying growth engine".

"The biggest constraint on the manufacturing sector hasn't been access to capital but rather weak demand, so expanding manufacturing investment mostly means expanding excess capacity," he explained.

By Sophie Rose, Alliance News senior reporter

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