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China Manufacturing Weak for Second Straight Month

Manufacturing growth in China contracted for the second consecutive month, according to a survey released Friday. Companies were forced to cut output prices causing profit margins to take a hit, and the news is fueling concerns about deflation.

HSBC and financial information services firm Markit released findings from the Flash China Manufacturing Purchasing Manager’s Index (PMI), a composite index based on five individual indices: new orders, output, employment, suppliers’ delivery times and stocks of items purchased.

The country’s manufacturing PMI rose to 49.8 for January, up from 49.6 in December—though lower than the 50-point level that indicates growth over contraction.

News of the contraction comes just days after China reported that economic growth slowed to 7.4% in 2014, compared to 7.7% in 2013 and its weakest in 24 years.

HSBC chief economist for China and co-head of Asian Economic Research Hongbin Qu said explaining the PMI changes, “Domestic demand improved marginally while external demand remained solid. The labour market weakened and prices fell further.”

Manufacturing output reached a three-month high, but was only slightly above the 50-point threshold at 50.1.

Qu added, “Today’s data suggest that the manufacturing slowdown is still ongoing amidst weak domestic demand. More monetary and fiscal easing measures will be needed to support growth in the coming months.”

Producer prices have fallen for almost three years straight in China and annual consumer inflation fell to a nearly five-year low of 1.5% in December. The manufacturing contraction has only added to concerns about deflation.

Stakeholders are discussing cutting interest rates further and putting pressure on banks to increase lending.

A Reuters poll of economists suggests the economy will slow further this year to roughly 7 percent despite stimulus measures. According to Reuters, a cooling property market, high corporate and local government debt could continue to drag on the activity.