(Bloomberg) -- China’s factory activity contracted again in January as a tepid improvement in foreign demand failed to outweigh the drag from poor domestic sentiment, dealing another blow to investors awaiting more signals on how the government will support the economy.

The official manufacturing purchasing managers index reached 49.2 this month, the National Bureau of Statistics said in a statement on Wednesday — above December’s reading but still below the 50 mark that separates expansion from contraction. 

The non-manufacturing gauge measuring activity in construction and services rose to 50.7, marginally better than the prior month and economists’ projections. A sub-index of services activity expanded for the first time since October, though growth in construction eased to a three-month low. 

“There is no signal of a turning point here,” said Galvin Chia, an emerging market strategist at NatWest Markets in Singapore. “The surprises are too small to change what is already a very entrenched bearish view on the outlook.”

Confidence in the world’s second-largest economy has flagged despite efforts by the government to add stimulus, including via measures to unleash more long-term cash for banks, tighten rules on the lending of shares for short selling and broaden developer access to loans. Nothing so far has lead to a meaningful turnaround in either activity or in the ongoing stock market rout that’s wiped out some $6 trillion in value. 

The onshore benchmark CSI 300 Index slid as much as 1.3%, on track to wipe out all gains from last week, which had been spurred by hopes of stronger government support. A gauge of China stocks listed in Hong Kong lost as much as 1.8%. 

The offshore yuan was little changed, while China’s 10-year government bond yield dropped to 2.43%, lingering at the lowest since 2002. The Australian dollar — which is risk-sensitive and seen as a proxy for China — declined 0.5%.

What Bloomberg Economics Says ... 

“The details showed demand made only a limited pickup. And even that was mostly driven by external demand. Domestic demand still appears to be struggling despite a range of stimulus measures having been rolled out since the second half of 2023. The message in these data — more support is needed.”

— Chang Shu and Eric Zhu, economists

Read the full report here.

Along with a years-long property crisis, economists have cited deflationary pressures as a key challenge for growth this year. Economists expect Beijing to announce a fairly ambitious 2024 growth goal when the national legislature meets in March, though maintaining a similar rate as last year’s “around 5%” target may be difficult given a higher base of comparison. Trade tensions with major partners are intensifying over key exports including electric cars, adding to downside risks.

While the manufacturing gauge was in contraction for a fourth straight month, its slight rise from December “suggests sentiment in the economy has had some improvement,” said NBS analyst Zhao Qinghe in a statement accompanying the PMI release. Zhao pointed to some positive signs for foreign demand, given the increase in a sub-gauge of new export orders to 47.2 — still well in contraction, though the best reading since September.

“One data print is probably not enough to ease investors’ concerns about the weakness in property and equity markets right now,” said Michelle Lam, economist for Greater China at Societe Generale SA. 

Investors will get a fuller picture of manufacturing activity on Thursday when Caixin publishes its private gauge, which covers smaller firms that has tracked above the official one for some time. Lam and others, though, have said they’re focused more on the NBS index given its more “extensive coverage.” 

The start of the year is generally a slower season for manufacturers in the lead-up to the Lunar New Year, a week-long holiday that will take place next month during which time factory activity comes to a standstill. Even so, the underperformance of the headline manufacturing gauge suggests underlying weakness in the economy, according to Bruce Pang, chief economist at Jones Lang Lasalle Inc. 

“Seasonality alone cannot fully explain the sluggishness of the manufacturing PMI,” he said. “Policy support is still needed to boost the effective demand in the society to maintain a sustainable recovery.”

Markets have been clamoring for more action in recent weeks, though policymakers have been cautious about what to deliver and how. People’s Bank of China Governor Pan Gongsheng lifted sentiment with his unusually early disclosure of a forthcoming cut to the reserve requirement ratio for banks — though the central bank had previously disappointed by holding a key policy rate steady.

“The recent roll out of monetary, property and capital market support could help to provide some relief,” HSBC Holdings Plc. economists including Erin Xin wrote in a research note. “We think more coordinated policy support, particularly from proactive fiscal policies, will be needed to prop up growth.”

--With assistance from Iris Ouyang, Wenjin Lv and Zhu Lin.

(Updates with more details, market reaction, commentary.)

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