China's manufacturing activity unexpectedly shrank in January after the official purchasing managers' index slumped to 49.1 from 50.1 in December. Such a performance translates to the lowest since August last year and says that China's second-largest economy in the world has been ravaged by its own set of problems. This means that falling beneath the psychological 50-mark means contraction while the reading comes in lower compared to what experts have forecasted of 50.1.

Though China's $18 trillion economy has met the government's growth target of "around 5 percent" for 2024, the rebound has been lopsided. Exports and industrial output have grown faster than retail sales, while joblessness is at a level anyone would agree to cut. Complicating things is the looming threat from U.S. President Donald Trump to apply a 10% tariff on Chinese imports as of February 1 in order to push Beijing to act tougher against fentanyl trafficking, may finally uncover just how much the country depends on exports to continue its economic boom.

China's trade surplus skyrocketed to almost $1 trillion last year, as producers shifted goods abroad to offset weak domestic demand. A combination of factory price deflation and a cheaper yuan helped spur export performance, but this comes at a price: falling domestic prices have squeezed corporate profits and workers' incomes, straining the broader economy.

The non-manufacturing PMI, covering services and construction, also weakened, slipping to 50.2 from 52.2 in December. As a result, policymakers have pledged further stimulus for 2025, but concerns persist that the focus will remain on industrial upgrades and infrastructure projects rather than stimulating household consumption. This could exacerbate factory overcapacity, reduce consumer spending, and increase deflationary pressures.

While Beijing has promised to stimulate domestic demand, so far just includes an expansion of a trade-in program on cars and appliances. However, Chinese leaders are still banking on late-2024 policy measures that will increase demand in the country's struggling property sector, which has a huge influence on local finances and demand.