China's manufacturing activity contracted at its fastest pace in almost three-and-a-half years in January, an official survey showed, suggesting the world's second largest economy is off to a weak start in 2016 and adding to the case for near-term stimulus.
The official Purchasing Managers' Index (PMI) stood at 49.4 in January, compared with the previous month's reading of 49.7 and below the 50-point mark that separates growth from contraction on a monthly basis. It is the weakest index reading since August 2012 and below the median 49.6 forecast from a Reuters poll of economists.
The PMI marks the sixth consecutive month of factory activity contraction, highlighting a manufacturing complex under severe pressure from falling prices and overcapacity in key sectors including steel and energy.
"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," said Zhou Hao, an economist at Commerzbank.
"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."
The Markit/Caixin factory PMI also showed activity deteriorating, although at a slower pace than in December. The index was 48.4, higher than economists' median forecast of 48.0, and above the December figure of 48.2.
The Markit report focuses more on small- and medium-sized firms as opposed to larger state-owned firms in the official survey.
Both the official and private factory surveys showed domestic and export demand remained weak and companies continued to shed staff.
China's plan to cut its steel production capacity by 100-150 million tonnes will lead to the loss of up to 400,000 jobs, the official Xinhua news agency reported last week.
"To maintain growth above 6.5 percent this year the economy will need more policy support," said Ding Shuang, head of Greater China Economic Research at Standard Chartered bank in Hong Kong.
"The fiscal deficit is almost certain to exceed three percent now, and there could be additional support from the policy banks. There is less room now for expansionary monetary policy although we expect the central bank to remain accommodative."
Recent statements from central bank officials suggest they are reluctant to implement further broad-based easing measures like cutting bank reserve ratios while pressure on the yuan from capital outflows remain strong.
Meanwhile, the official non-manufacturing Purchasing Managers' Index (PMI) fell to 53.5 from December's 54.4, showing a slight slowdown in services activity growth.
With manufacturing decelerating quickly, services have been a crucial source of growth and jobs for China over the past year, and analysts have been watching closely to see if the sector can maintain momentum in 2016.
Analysts note headline PMI data in January might be distorted as activity tends to slow in the weeks leading into the Lunar New Year break, which begins this year on 8 February.
China's economic growth cooled to 6.9 percent in 2015, the slowest pace in 25 years, adding pressure to policymakers who are already struggling to restore the confidence of investors after a renewed plunge in stock markets and the yuan currency.