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Dip in China, South Korea Data Hints at Risks for Asia’s Growth

  • China’s gauge of new export orders dropped the most since 2012
  • Japan industrial production, China services show strength

In a potential early-warning sign that Asia’s growth momentum is weakening, China’s official factory gauge missed estimates and South Korea’s industrial output dropped.

China’s official factory gauge slumped to an eight-month low in January while South Korea’s industrial output tumbled 6 percent in December from a year earlier, a third consecutive month of contraction, according to official data released by the countries Wednesday.

Beijing’s policies to purge pollution and excessive borrowing, plus a strengthening yuan, threaten to weigh on its growth in coming months. Heightened trade tensions with the U.S. loom as a potential headwind for nations across Asia, with President Donald Trump again referring to China and Russia as "rivals" in his first State of the Union address Tuesday.

"Timely data suggest that the solid momentum in Asia’s industrial activity may be starting to come off the boil," said Rob Subbaraman, an economist at Nomura Holdings Inc. in Singapore.

Readings for China’s small, medium and large companies all decreased, with small enterprises falling to 48.5, below the 50 level that denotes contraction. The timing of the Lunar New Year holiday, during which factories and offices tend to shut down for weeks, often distorts national economic data for the first two months of the year and exports typically decline in January. This year’s break runs Feb. 15-21, later than last year.

A gauge of China’s new export orders dropped the most since 2012, pushing it below 50 for the first time since October 2016. The reading for input prices fell to a six-month low. Stocks of finished goods increased to the highest level since April.

What Our Economists Say...

"The revival in exports has been a critical factor in turning around China’s growth fortunes. But the drop in the PMI export orders index is a reminder that sustaining growth will be tough," said Tom Orlik, Bloomberg chief Asia economist in Beijing, wrote in a note. "A drumbeat of protectionist signals from the U.S. suggest there may be trouble ahead."

The stronger yuan also is pressuring exporters, which took a toll on the new orders index, said the China Logistics Information Center, which helps compile the PMI survey, in a statement on their website.

Manufacturing Activity

"Fluctuations in exports have dragged down manufacturing activity significantly," said Chen Zhongtao, an analyst at the center, adding that the economy will stabilize as factories accelerate production from March.

Trade tensions are rising between the two biggest economies with the U.S. already slapping tariffs on solar panels and washing machines. Trump has about three months to decide whether to impose tariffs on imported steel and aluminum, while his top trade official is probing China’s intellectual-property practices.

South Korea’s December industrial output came in below economists’ expectations, a decline driven by an auto strike and sluggishness in the shipping industry. The weak data may be temporary as the government plans to raise fiscal spending for job creation and social welfare this year, said Kwon Young-sun, a Seoul-based economist at Nomura.

Not all today’s data out of Asia was downbeat. Japan’s industrial production accelerated in December, pushing output to the highest level since the global financial crisis. Strong global demand has driven a year-long recovery in exports, prompting Japanese manufacturers to steadily raise production throughout 2017.

Outside of manufacturing, China’s activity was also brighter. The non-manufacturing PMI rose for a third consecutive month and exceeded expectations. Strength in a services sector sub-index helped offset weaker construction activity.

"China’s manufacturing sector is taking a breather at the start of the year," said Frederic Neumann, co-head of Asian economics research at HSBC Holdings Plc in Hong Kong. "Services, on the other hand, are on a roll, reflecting soaring consumer optimism in China. This is more evidence of a gradual rebalancing away from manufacturing toward services and consumption."

— With assistance by Kevin Hamlin, Yinan Zhao, Tian Chen, Miao Han, and Jiyeun Lee

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