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China’s manufacturing output is shrinking and it’s hitting the little guys first

Millions of small Chinese factories are falling prey to a slowing economy. The latest evidence: the flash Markit/HSBC Purchasing Manager’s Index, which is more weighted toward smaller, private companies than the government’s own index, dropped to 49.6 in January—below the critical 50 mark that divides contraction from expansion.

The reading is the latest in a series of disappointing Chinese economic data points. It marks the lowest flash PMI number in six months and the first time in five years that the index dropped rather than increased in January, according to an economist with Credit Agricole CIB. The official China PMI index, which is more heavily weighted toward large state-owned companies, fell to 51.0 in December.

Chinese policymakers are trying to rebalance the economy to be more reliant on domestic consumption and services, a shift that risks causing job losses in the traditional manufacturing sector—and, in the nightmare scenario for Chinese leaders, social instability. While larger and medium-sized factories are consolidating or moving elsewhere in Asia, smaller ones have been forced to close or reduce production. Ahead of the Lunar New Year holiday, factories closed earlier than usual this year.

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