Are January’s PMI figures a sign that China’s economy is cooling?

This week has seen the release of two sets of PMI (purchasers’ manufacturing index) figures for January—the official government figures, released Wednesday, and the Caixin General Manufacturing PMI, which was published a day later.

Analysts have been particularly impatient to see the first PMI figures of 2018 as they try to detect any sign that the Chinese government’s tightening of financial and environmental regulations is choking off the economy’s strong growth from 2017.

Here’s a quick roundup of the two reports and the reactions to them:

Official PMI:

The official China general manufacturing PMI figures for January showed a small dip from 51.6 to 51.3, an eight-month low.

– Output, new orders, and imports all declined, reflecting a contraction in demand.

– The index for export orders fell the furthest, below the 50 average mark to 49.5, suggesting a waning in foreign demand for Chinese goods.

– Inflation eased, with input costs rising at the lowest pace in five months.

Mizuho Securities attribute the dip in demand to “tightening liquidity following the Chinese Communist Party’s 19^th Congress”. However, the group holds a generally positive outlook going forward, predicting “solid trade growth in 2018 amid the strong global recovery, especially in Europe.” Though they note that “monetary tightening should remain the key theme in 2018 and we expect investment growth to slow notably.”

Nomura believe that growth momentum across all sectors will be moderated in January by the weaker-than-expected manufacturing sector.

ANZ focused on the outlook for trade, commenting: “what looks worrying to us is not the slight decline in the headline manufacturing PMI (-0.3) in January but the fall in new export orders.”

Standard Chartered were less alarmed, calling the outlook for Chinese manufacturing “generally stable” and noting that sub-indices such as production and new orders, while falling, “remained in expansionary territory” in January. However, they also warned that “new export orders fell into contractionary territory, suggesting downward pressure on export growth.”

Caixin PMI:

The Caixin PMI figures presented a much rosier picture to the official data, with the index remaining unchanged from December at 51.5.

– Production grew at the quickest pace since December, 2016, according to the report, with new sales also rising for the 19^th month in a row, albeit at a softer rate than December.

– Employment continued to fall across the sector, but also at a more temperate rate – the slowest decline in almost 3 years.

– The general view among companies in the survey was that January was a strong month and output will continue to rise.

Despite the optimistic outlook, Capital Economics advise that these strong figures should nevertheless be approached with reserve: “even if the hard data confirm a steady start to the year, we suspect that this will have been at least partly due to factories ramping up production in order to clear backlogs caused by anti-pollution restrictions …not entirely due to resilient underlying demand.”

The Caixin index differs from the official index around 40% of the time, and some analyst groups, including Capital Economics, believe the Caixin figure to be a more accurate reflection of cyclical economic trends.