The activity of China March factories increases for the first time in four months, but exports are weak

BEIJING (Reuters) – An official survey revealed Sunday that the factories in China had unexpectedly increased for the first time in March, suggesting that government stimulus could begin to take shape in the world's second-largest economy .

If it continues, improving economic conditions could indicate that the manufacturing sector is on the road to recovery, thereby easing fears that China is slipping into a deeper economic slowdown.

Analysts, however, remained cautious, citing seasonal distortions due to the long lunar new year break in February. According to them, real investment and consumer demand remained weak and increased inventories, which could increase pressure on the sector.

The official PMI rose to 50.5 in March from 49.2 in February, its lowest level in three years, the first increase in four months, according to published data. Sunday by the National Bureau of Statistics (NBS). The 50 mark marks the distinction between growth and contraction on a monthly basis.

Analysts polled by Reuters had predicted that the production indicator would rise slightly to 49.5, as factories increased their output after Lunar New Year holidays and restocked their stocks before a seasonal pickup in activity in spring.

Factory production rose at its fastest pace in six months in March, reversing a brief contraction the previous month. It went from 49.5 in February to 52.7, its highest level since September 2018.

The total number of new orders also increased at a faster pace, pushing factory exit prices up to 51.4, its highest level in five months, ending four months of contraction.

"This jump will likely give a boost to the stock markets and could delay a reduction in the reserve requirement ratio (RRR)," said Ting Lu, chief economist at Nomura, China.

China has announced five RRR cuts in the past year to free up more money for banks to increase lending to private companies, and further cuts are expected.

Ting said that there was a limited margin for the manufacturing PMI to rise further and the chances of another trough to be "not low".

"Overall, while March's manufacturing PMI may somewhat dampen pessimistic expectations in the economy, we believe the real situation may not be as optimistic as this indicator suggests," Lianxun Securities said in a statement. a note.

Export orders declined for the tenth consecutive month, suggesting that external demand remained sluggish and that it may be necessary to take additional measures if trade tensions intensified. China's trade-oriented neighbors, Japan, South Korea, and Taiwan, have seen more signs of slowing demand, both in China and elsewhere.

"Construction work starting in the beginning of the year has resulted in strong domestic demand, but external demand remains weak and import and export prospects are still not optimistic," they said. economists from Huatai Securities.

Washington and Beijing tariffs remain in place as talks continue to end a trade war that has disrupted the movement of billions of dollars of goods between the two largest economies in the world.

US President Donald Trump said Friday that negotiations with China were going very well, but added that he would accept nothing less than a "good plan" after the top officials have completed their two-day talks in Beijing.

SPECTRUM OF LAYERS

Factories laid off more workers in March, with the employment sub-index still below 50% unchanged. It increased slightly from 47.5 in February to 47.6.

Faced with rising labor costs and declining sales, foreign companies, from automakers to electronics companies, have decided to close factories in China during recent months, which gives rise to fears of more layoffs.

Sony Corp closes its Beijing smart phone factory, while Samsung Electronics ceased operations at one of its mobile phone manufacturing plants last year.

In February, the unemployment rate reached 5.3%, its highest level in two years.

The PMI survey showed that small and medium-sized enterprises behaved even worse than large firms, many of which were state-controlled, although their activity improved compared to the previous month, suggesting that The efforts of policy makers to allocate affordable financing to the private sector are paying off.

Policymakers have recognized that the economy is under pressure. Multi-year campaigns to mitigate debt and pollution risks deterred new investment, while the US-China trade war was hurting China's export sector and threatening to create more business. jobs.

In response, Beijing plans to increase spending on roads, railways, and ports, as well as tax cuts of nearly 2 trillion yuan ($ 297.27 billion) to lighten the balance sheets. enterprises.

The measures will take time, say analysts who believe that economic activity will not stabilize before the middle of the year. Data released Wednesday shows that industrial profits fell 14% in the first two months of the year, the largest decline since at least the end of 2011.

In the iron and steel industry, steel mills are expected to limit production, as flooding of products on the market significantly hampers profit margins in the sector.

Growth in China's services sector – accounting for more than half of the economy – picked up in March as new orders grew faster. The official non-manufacturing Purchasing Managers Index (PMI) increased from 54.3 to 54.8.

Construction work resumed its march pace in March with the return of heat. An under-reading for construction activity stood at 61.7 in March, up from 59.2 in February.