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China Factory Activity Falls at Fastest Pace in Three Years

China is ringing in the new year on a weak note as falling prices and overcapacity continue to pressure manufacturing in the country.

The official monthly Purchasing Managers’ Index (PMI) showed China’s manufacturing activity came in at 49.4 in January, its sixth consecutive month of factory activity contraction, as indicated by a sub-50 reading.

It is also the country’s weakest reading since August 2012, down further from December’s 49.7, and below the 49.6 a Reuters poll of economists forecast.

“The electricity production remained sluggish and the crude steel output continued the weak trend in January, reflecting an ongoing deleveraging process in the industrial sectors,” Reuters reported Zhou Hao, an economist at Commerzbank, as saying. “In the meantime, China has started an aggressive capacity reduction in many sectors, which could add downward pressure on the bulk commodity prices over time.”

According to the Markit/Caixin report, which focuses more on small- and medium-sized firms instead of the larger state-owned firms the official survey reports on, China’s manufacturing PMI was 48.4, up a touch from 48.2 in December, “signaling a further modest deterioration in the overall health of China’s manufacturing sector.”

Output and employment declined at faster rates in January than December, total new business fell at the weakest rate in seven months and lower production requirements forced companies to cut back on their purchasing activity and inventory of inputs.

“Recent macroeconomic indicators show the economy is still in the process of bottoming out and efforts to trim excess capacity are just starting to show results,” Dr. He Fan, chief economist at Caixin Insight Group said. “The pressure on economic growth remains intense in light of continued global volatility.”

Manufacturing employment in China also slowed, with job cuts hitting a four-month record in January as companies downsized due to insufficient workloads. Disappointing sales also led to a slight inventory accumulation of finished goods.

“The government needs to watch economic trends closely and proactively make fine adjustments to prevent a hard landing,” Fan added. “It also needs to push ahead with existing reform measures to strengthen market confidence and to signal its intentions clearly.”