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

By Yawen Chen and Ryan Woo

BEIJING (Reuters) – An official survey on Sunday revealed that factory activity in China had unexpectedly increased for the first time in four months in March, suggesting that government stimulus could begin to take shape.

If maintained, improving economic conditions could indicate that the struggling manufacturing sector is on the road to recovery, easing fears that China will slip into a deeper economic recession.

But many analysts have remained cautious about growth prospects, citing seasonal distortions caused by the long Lunar New Year break in February. They argue that real investment and consumer demand have remained weak and have increased inventories at a higher rate, which could increase pressure on the sector.

The official index of purchasing managers (PMI) reached 50.5 in March, against 49.2 in February, its lowest level in three years. This is the first increase in four months, according to data released 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 the stock markets a boost and could delay the reduction in the reserve requirement ratio (RRR)," said Ting Lu, Chief Economist at Nomura, for 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, although the manufacturing PMI in March may somewhat dampen the pessimistic expectations of the economy, we believe that the real situation may not be as optimistic as this indicator reflects," he said. Lianxun Securities.

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. Neighboring countries of Japan, South Korea and Taiwan, which are trade-oriented, have seen growing signs of slowing demand, both in China and elsewhere.

"Construction work starting early in the year has resulted in strong domestic demand, but external demand remains weak and prospects for imports and exports are still not optimistic," said economists from Huatai Securities.

Customs duties imposed by Washington and Beijing remain in place as negotiations 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. It is not clear if an agreement acceptable to both parties can be reached.

US President Donald Trump said Friday that the talks 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.

Vice Premier Liu He will visit Washington on April 3 for further talks.

SPECTRUM OF LAYERS

Chinese factories laid off more workers in March, with the employment sub-index rising from 47.5 to 47.6 in February.

Faced with rising labor costs and declining sales, a growing number of foreign companies, from automakers to electronics manufacturers, have decided to close factories in China during recent months, which gives rise to fears of more layoffs. In February, the unemployment rate reached 5.3%, its highest level in two years.

Sony Corp. (T 🙂 is closing its Beijing smartphone factory and production will stop by the end of the month, while Samsung Electronics (KS 🙂 has ceased operations in one of its mobile phone manufacturing plants in China last year.

The PMI survey showed that small and medium-sized businesses were even less successful than large firms, many of which were state-controlled, although their business had improved compared to the previous month. .

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 affected China's export sector and threatened to create more revenue. 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%, the largest decline since at least the end of 2011.

Growth in China's services sector – accounting for more than half of the economy – accelerated in March as new orders grew faster. The official index of non-manufacturing purchasing managers (PMI) rose 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.

(This story has been redefined to correct a typo in paragraph 3)