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Eastern manufacturing goes south

China’s manufacturing powerhouse is shrinking at the fastest rate in more than three years.

January was not a good month for China’s manufacturing sector as activity shrank at its fastest rate in almost three and a half years. Figures show how the official purchasing managers’ index stood at 49.4 in January, compared to December’s reading of 49.7. In both months, the PMI index stood below the 50-point mark which separates growth from contraction on a monthly basis.

January’s PMI reading of 49.4, which is the weakest index reading since August 2012, marks the sixth consecutive month of contraction. This poor performance is being fuelled by falling prices and overcapacity in key sectors such as steel and energy.

To counter this downward trend, China has started an aggressive capacity reduction in many sectors. This is a critical move because, even though the first quarter is always the weakest in China due to the disruption of the Chinese new year, the fiscal stimulus in 2015 has only managed to slow down the rate of China’s industrial activity.

Meanwhile, other countries are suffering the slowdown in China’s manufacturing activity. For instance, in January, South Korea’s exports have suffered their worst downturn since the global financial crisis in 2009. Shipments to China, which is South Korea’s largest market, tumbled 21.5 per cent on-year in January, with the trade ministry saying that the export conditions are bound to get worse.

While the manufacturing sector is performing poorly, China’s services sector has been a source of crucial growth and jobs for China since 2015. Analysts are watching closely to see whether the services industry will maintain its momentum in 2016.

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