Asia Factory Activity Lackluster on Soft Chinese Demand, PMI

Factory activity weakened across Asia in December as the US-China trade war and a slowdown in Chinese demand hit production in most countries, strengthening the case for a pause in interest rate hikes in the region in 2019.

A series of purchasing manager’s indexes for December that was released on Wednesday mostly showed declines or slowdowns in manufacturing activity across the region. In China, the Caixin/Markit PMI slumped into contraction zone for the first time in 19 months, broadly tracking an official survey released on Monday.

China’s weakness spilled over to the Asian economies, with Malaysia’s manufacturing activity shrinking to its weakest pace of expansion since it launched the poll in 2012 and Taiwan contracting to its lowest since September 2015.

Meanwhile, official economic data out of Singapore showed its gross domestic product grew more slowly than forecast in the fourth quarter as the city-state’s manufacturing sector contracted on a quarterly basis.

In other regions, the euro zone was expected to post steady manufacturing activity growth, while US activity was seen a tad slower, but firmly in expansion territory, in a sign that so far China has suffered more damages from its trade frictions when compared to the United States.

With growth slowing and inflation below or barely within target in most countries, Asian central banks are unlikely to continue their tightening cycle this year, barring any dents in the currency markets.

“We are really seeing a global slowdown into this year, and in Asia, particularly export-oriented countries are hurting,” said Irene Cheung, who is Asia strategist at ANZ. “Our expectation for central banks is that most of them won’t change policy in 2019 and these numbers coming out on the weak side won’t change that outlook.”

The world’s two biggest economies agreed at the beginning of December to a 90-day truce following aggressive tit-for-tat tariffs that have disrupted the flow of hundreds of billions of dollars of goods between the two countries.

The two sides have promised to hold frequent talks in the next couple of months, but uncertainty over whether they can bridge massive differences over commercial practices and intellectual property rights remains very high, in spite of the US president Donald Trump noting “big progress” in a tweet.

Tariffs are not the only drag on China’s economy. Beijing’s sustained drive to reduce debt risks in the economy has cooled the property market and curbed credit flows to the private sector. Meanwhile, the government’s intensified war on pollution has damaged industrial activity.

In a key yearly conference last month, China’s top leaders said that they will bolster support for the economy in 2019 by cutting taxes and keeping liquidity ample, while promising to continue negotiations with Washington.

“The People’s Bank of China may have to ease further to offset the impact of tariffs,” said Robert Michele, who is the chief investment officer and head of fixed income, JP Morgan Asset Management.

China’s economic growth slowed to 6.5 percent in the third quarter of the previous year, the weakest since the global financial crisis. Reports have said that government advisers had recommended a growth target of 6.0 to 6.5 percent for this year at the annual parliament meeting in early March.

A sharp drop in the crude price at the end of last year has helped sentiment in Asia’s oil-importing economies, where trade deficits are a key vulnerability.

Indonesia’s PMI index, although still weak historically, increased to 51.2 from November’s 50.4, a four-month high. India has declined to 53.2 from 54.0, but capped the strongest quarter for the country’s manufacturing sector since the latter part of 2012.  Philippines PMI was also 53.2.