The privately conducted Caixin / IHS Markit China General Manufacturing PMI showed a decline in December falling 0.3 points from the previous month, indicating weakness that was also reflected in the official PMI data released earlier in the week, which showed a much lower reading.

The Caixin PMI posted 51.5 in December, down from 51.8 in November. Earlier, data showed official manufacturing PMI was 50.2 in December, unchanged from the previous month.

“Purchasing activity rose … though the rate of growth cooled from November. This, in turn, led to an increase in inventories of purchased items. Inventories of finished goods also expanded at the end of the year, which some companies linked to expectations that demand conditions will improve in the months ahead,” said the Caixin report.

The seasonally adjusted Caixin PMI is a composite indicator designed to provide a single-figure snapshot of operating conditions in the manufacturing economy, particularly among categories of enterprises that may not be fully reflected in the state’s official PMI numbers.

The Caixin China General Manufacturing PMI is based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 500 industrial companies.

The panel is stratified by company size and by standard industrial classification (SIC) group, based on industry contribution to Chinese GDP. An index reading above 50 indicates an overall increase in that variable; below 50, an overall decrease.

“We think that exports will continue to benefit from recovering global demand and, at the margin, US tariffs rollbacks. But domestic demand will probably cool further,” said Julian Evans-Pritchard, Senior China economist at Capital Economics.

There were some signs in the survey data of a genuine improvement on the external front. The new export orders components of the PMIs are now both above 50 for the first time since early 2018, before the trade war kicked off, and point to a rise in exports.

Despite all readings in expansionary territory, analysts said there were hurdles to be crossed.

“We doubt this means the worst is over for China’s economy. While it does appear that export growth is bottoming out, downside risks to domestic demand, especially from the property sector, still cloud the outlook,” said Evans-Pritchard.

The Caixin index compilers said the rate of new order growth eased to a three-month low, and export sales rose only slightly. At the same time, confidence towards the 12-month business outlook remained relatively weak, and staffing numbers stagnated. The index reading was lowest since September.

“In a nutshell, both Caixin and Official PMI signaled slowing expansion of domestic activities,” said Zhaopeng Xing, China markets economist at ANZ.

“Although Chinese goods producers generally expect output to rise over the next year, concerns over ongoing trade tensions, environmental protection policies and intense market competition meant that overall sentiment remained weaker than the historical trend,” IHS Markit said in a statement.

Underlining these concerns was a move by China’s central bank, which announced on Wednesday a reduction in the money that banks have to hold in reserve to support the economy by releasing an estimated 800 billion yuan into the banking system.

“The move reaffirms accommodative policy, with earlier-than-expected full conversion to LPR [Loan Prime Rate] to unclog monetary transmission, and Local Government Special Bonds issuance could start on Jan.2 [earlier than it did in 2019] with potential US$125bn increase in annual quota and stronger pass-through to infrastructure capex,” wrote Morgan Stanley economists in a report published on Thursday.

“Coupled with the expected signing of the phase one trade deal, these echo our view that reduced external uncertainty and stable policy support could induce a modest mini-cycle growth recovery in China,” they said while adding that GDP growth was likely to reach 6.0%Y in 1H20 and 6.1%Y in 2H20.

Wednesday’s announcement of the reserve requirement cut was unlikely to bridge the liquidity shortage in the economy – Nomura estimates the gap could be 2.7 trillion yuan – but it boosted market sentiment. Hong Kong’s Hang Seng benchmark rose 1.3% while the Shanghai Composite index rose 1.6%.

Barclays economists said the PBoC move was aimed at lowering banks’ funding costs, which in turn should lower financing costs for the real economy, to offset the liquidity drain due to front-loaded local government special bond issuance and cash demand around Lunar New Year and to lend support to credit growth.

“We think the PBoC will maintain accommodative monetary policy stance and expect another 100-150 bp [basis points] of RRR cuts during Q2-Q4,” they said.