China's manufacturing activity contracts for fourth consecutive month
What's the story
China's manufacturing sector experienced its fourth consecutive month of contraction in January 2024, signaling a sluggish start to the year for the industry and the world's second largest economy. The official purchasing managers' index (PMI) increased slightly to 49.2 in January from 49.0 in December, due to a boost in output. However, the key parameter remained below the 50-point threshold that distinguishes growth from contraction.
Economic implications
China's central bank may cut rates to ease deflationary pressure
Chief economist at Pinpoint Asset Management, Zhiwei Zhang, noted that economic momentum is still weak in China as deflationary pressure continues. As a counter-measure, China's central bank is expected to cut rates in first half of the year to stimulate demand. January's new orders sub-index contracted for the fourth month. Owing to poor external demand, China's new export orders index also contracted for the tenth straight month.
Measures to boost growth
China reduces reserve requirement ratio for banks
In an effort to boost growth, China's central bank unexpectedly announced a reduction in banks' reserve requirement ratio last week. The ratio is defined as the percentage of deposits that a bank should maintain in reserve. China faces a challenging task as it attempts to rejuvenate economy amidst a property downturn, local government debt risks, deflationary pressures, and weak global demand.
Projection for 2024
IMF raises China's growth forecast for 2024
The International Monetary Fund has raised China's growth forecast for this year to 4.6% from 4.2% citing fiscal support from authorities and a less severe slowdown in the property sector than anticipated. China will not announce its 2024 growth target until March, but insiders predict it will maintain its goal of around 5% growth. Julian Evans-Pritchard, head of China economics at Capital Economics, stated that the recent increase in PMIs provides further evidence that China's growth momentum is experiencing recovery.