China's manufacturing activity contracted for the sixth straight month in January, signalling persistent weakness, but analysts expect the broader economy to gradually stabilize as positive factors accumulate.
The purchasing managers' index (PMI) came in at 49.4, down from 49.7 in December, the National Bureau of Statistics (NBS) and the China Federation of Logistics and Purchasing data showed Monday.
A reading above 50 indicates expansion, while a reading below 50 reflects contraction.
The index, below the market forecast of 49.6, fell to its lowest level since August 2012, as China's economy is seeking new growth engines amid a housing market slowdown and a campaign to cut industrial overcapacity.
NBS statistician Zhao Qinghe attributed the retreat to slowing factory activity ahead of the Chinese New Year holiday in early February, as well as the trimming of industrial capacity.
The economic slowdown both at home and abroad also affected aggregate demand and foreign trade growth, Zhao explained.
China's stock market opened lower following the data release, with the benchmark Shanghai Composite Index down 0.24 percent at 2,730.98 points.
Breaking it down, the sub-index measuring production stood at 51.4, down 0.8 points from a month earlier, and that for new orders settled at 49.5, down 0.7 points.
A separate survey by financial information service provider Markit sponsored by Caixin Media also showed a modest deterioration in Chinese manufacturers's operating conditions.
The Caixin General China Manufacturing PMI stood at 48.4 in January, up 0.2 points from December.
"Recent macroeconomic indicators show the economy is still in the process of bottoming out and efforts to trim excess capacity are just starting to show results. The pressure on economic growth remains intense in light of continued global volatility," the Caixin report said.
The official PMI samples 3,000 large enterprises in China. The Caixin PMI samples 420 small and medium-sized manufacturing enterprises and is relatively volatile due to its sample size and the dominance of small enterprises.
The disappointing data at the start of 2016 came after China's economy grew by 6.9 percent year on year in 2015, its lowest annual expansion in a quarter of a century.
Minsheng Securities said the weak reading showed monetary easing and pro-growth policies, including several cuts in interest rates and bank reserve requirement ratios, have yet to arrest the economic slowdown.
To start new growth engines, the government has pinned its hopes on supply-side structural reform, which focuses on better provision of high-quality goods and services and lower costs for businesses.
"Until the supply-side reform really shows results, the economy will remain under downward pressure," according to Minsheng.
HSBC chief China economist Qu Hongbin forecast that economic growth would remain subdued in the first quarter of 2016 and that the government would be prompted to come up with stronger fiscal and monetary support.
The Hong Kong-based bank reckons more fiscal policy expansion, ranging from tax cuts, infrastructure investment to targeted measures to reduce excess inventories in third and fourth-tiered cities, will be needed to generate a turnaround in economic activity.
But Chen Zhongtao, analyst with the China Logistics Information Center, believes the weak data in January is not necessarily indicative of a trend as there are seasonal effects at work, with the Chinese Lunar New Year holiday disrupting production activities.
The sub-index measuring consumer goods rose to 57.8 percent in January, 3.4 percentage points higher than December. Meanwhile, indexes for food, tea, tobacco, automobile, electric and pharmaceutical industries expanded for a 3rd consecutive month.
"This showed restructuring efforts are bringing about positive changes,"said Zhang Liqun, researcher with the Development Research Center of the State Council.
Zhang expected the economy will stabilize as the effects of various pro-growth policies filter through.
