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China manufacturing index drops to six-month low: HSBC

BEIJING--Chinese manufacturing contracted for the first time in six months in January, a survey showed Thursday, casting a pall over growth prospects for the world's second-largest economy this year.

British banking giant HSBC's preliminary reading of China's purchasing managers' index (PMI), which tracks manufacturing activity in factories and workshops, fell to 49.6 in January, the lowest since August.

The index is a closely watched gauge of the health of the Asian economic powerhouse. A reading above 50 indicates growth, while anything below signals contraction.

The last time the figure for China dropped below the critical point was in July, when it stood at 47.7.

“The marginal contraction of January's headline HSBC Flash China Manufacturing PMI was mainly dragged by cooling domestic demand conditions,” Qu Hongbin, the bank's economist in Hong Kong, said in a statement accompanying the data.

“This implies softening growth momentum for manufacturing sectors, which has already weighed on employment growth,” he said, adding Beijing was likely to maintain policy support for economic expansion.

The PMI announcement came after China on Monday said its 2013 economic growth came in at 7.7 percent, maintaining its slowest expansion in more than a decade.

Zhang Zhiwei, a Hong Kong-based economist with Nomura International, said the PMI contraction in January could be traced back to several liquidity crunches since June that sent interbank interest rates soaring.

The moves were widely seen as being engineered by officials aiming to increase financial discipline over banks.

“There has been market debate on whether the rising interest rates since June 2013 would significantly affect the real economy,” Zhang wrote in a research note.

“The weak PMI reading suggests that this negative effect may have finally started to kick in.”

But some analysts cautioned that the preliminary PMI figure could be distorted for reasons including the Chinese New Year holiday season, which shifts annually and begins at the end of this month.

“This drop could raise growth concerns and weigh on market sentiment. However, we suggest no blind trust of PMI, especially around the Chinese New Year holiday,” Bank of America Merrill Lynch economists said in a note.

They also cited the survey's focus on small companies and its relatively small sample size.

The government has warned of “deep-rooted problems” the country faces this year, including a mountain of local authority debt, which experts consider a serious potential drag on the economy unless steps are taken to rein it in.

HSBC said it will release this month's final PMI reading on Jan. 30.

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