The official manufacturing purchasing managers’ index fell to 49.1, the lowest since August, missing economists’ forecast for a modest expansion. The non-manufacturing gauge for construction and services dropped to 50.2, just above the 50-mark that separates growth and contraction.

While factory activity typically cools before the Chinese New Year period as production winds down, economists said the slowdown this month was more severe than usual, adding to signs of weakness despite recent efforts to boost the world’s second-largest economy.

“The extent of decline is beyond our expectation,” said Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group, adding that a stronger fiscal policy and a cut to the reserve requirement ratio for banks were still on the table. “The economy is far from recovering.”

The CSI 300 Index of onshore Chinese stocks swung to losses after posting a modest gain. China’s 30-year government bond futures rallied 0.7%, while the yuan fell about 0.3% in both onshore and overseas trading.

The PMI figures released Monday by the National Bureau of Statistics are the first official data available each month to provide a snapshot of the health of the Chinese economy, which is struggling to overcome the twin challenge of weak domestic demand and growing trade headwinds.

As competition intensified and deflationary pressures mounted, China’s industrial firms saw their profits drop in 2024 for the third consecutive year. Industrial profits at large Chinese companies fell 3.3% last year, although a 11% surge in December helped recoup some losses.

Both production and new orders fell to a five-month low, according to the PMI data. New export orders dropped to the lowest since February, suggesting weak global demand.

Manufacturing was “affected by the approaching Spring Festival holiday and the concentrated return of employees to their hometowns,” Zhao Qinghe, senior statistician at the NBS.

Zhiwei Zhang, chief economist at Pinpoint Asset Management, said while factory activity slowed in part because of the eight-day New Year holiday in January, it could also mean exports benefited less from businesses front-loading their orders to dodge any new tariffs. 

Steep U.S. levies could hurt China’s exports, which made up nearly a third of growth last year, and add to costs for manufacturers that are already facing price pressure from intense competition and sluggish consumer sentiment. U.S. President Donald Trump has so far refrained from imposing tariffs on China in his first days in office, although his plans remain unpredictable.

China met the official growth target of 5% last year, thanks to a late policy blitz and export boom. But the economy’s recovery has been uneven, with manufacturing at times a bright spot while consumption has been weighed down by a weak jobs market and a prolonged real estate crisis. 

China’s trade surplus soared near an unprecedented $1 trillion last year, a growing imbalance that has spooked trade partners. Among them, the European Union has accused Beijing of building excess capacity in its industries through state subsidies and put up new trade barriers that held back sales of electric vehicles.