Slowing growth of factory activity in China challenges prospects for economic recovery

BEIJING (Reuters) – China’s manufacturing activity expanded at a slower pace in March, official data showed on Friday, raising doubts about the strength of a post-coronavirus recovery in factories amid weak global demand and a slumping property market.

The services sector was stronger, with activity expanding at the fastest pace in nearly 12 years after the end of China’s COVID-free policy in December boosted transportation, accommodation and construction.

The official manufacturing purchasing managers’ index (PMI) held steady at 51.9 versus 52.6 in February, according to data from the National Bureau of Statistics (NBS), above the 50-point mark that separates expansion and contraction in activity on a monthly basis.

That slightly exceeded the forecast of 51.5 favored by economists in a Reuters poll, and boosted the yuan against the dollar. The February number grew at the fastest pace in over a decade.

Economic activity in China rebounded in the first two months of 2023 as investment in consumption and infrastructure led to a recovery after the COVID-19 disruptions ended and retail sales returned to growth.

Nomura economists said the strong data indicated that the Chinese economy had reached a “good point” after the end of the tightening of ownership and the anti-coronavirus policy.

“However, amid rapidly escalating geopolitical tensions and financial concerns outside of China, this may not last long,” they added in a note.

Exports remain weak and new home sales continue to decline, although the rate of decline has narrowed.

In an accompanying statement, the National Bureau of Statistics said that businesses are facing challenges including weak demand, narrow availability of capital and high operating costs, and the foundations for economic recovery must be further strengthened.

To support the recovery, China’s central bank unexpectedly this month cut the amount of liquidity banks must hold as reserves for the first time this year.

While business and consumer sentiment has begun to recover, the manufacturing sector remains under pressure amid sluggish global demand and stubbornly rising costs.

Any fallout from the recent crisis of confidence in the global banking sector could also affect demand for Chinese goods, adding pressure to manufacturers.

Official data this week showed that the slowdown in profits for Chinese industrial firms deepened in the first two months of the year, marking a pessimistic start to the recovery.

Factory activity was hit by slower growth in production and customer demand, with sub-indices for production and new orders showing declines from February levels.

The new export orders sub-index fell to 50.4 from 52.4 in February, indicating weaker external demand.

A strong recovery in services activity

In contrast, the non-manufacturing PMI jumped to 58.2 from 56.3 in February, reaching the highest level since May 2011 as the services sector recovered.

“The strong momentum is likely to continue in the coming months, as the new orders index for the services sector continues to rise,” said Zhiwei Zhang, president and chief economist at Pinpoint Asset Management.

Retail sales in the first two months jumped 3.5% from a year earlier, reversing the 1.8% annual decline seen in December, which raised hopes of a consumption-led economic recovery as weak global demand dampens exports.

The government’s soft tone towards the private sector also boosts market confidence.

The return of the Alibaba Group founder (9988.HK), and the company’s plans for a major revamp, have been seen as signaling an end to Beijing’s regulatory crackdown on private companies.

“These policy measures will help the economy maintain strong momentum. We believe GDP growth may exceed 6% this year,” Zhang said.

The world’s second-largest economy has set a modest target for economic growth this year of around 5%, after it cooled to just 3% last year, one of the weakest performances in nearly half a century.

(Reporting by Liangbing Gao and Ryan Wu) Editing by Jamie Fried

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