BEIJING (Reuters) – Factory activity in China grew unexpectedly for the first time in four months in March, showing an official survey on Sunday, suggesting that state-stimulating measures may begin to address the world's second largest economy.
FILE PHOTO: Employees are working on the production line for a factory that manufactures fashion accessories in Sihong Province, Jiangsu Province, China, March 27, 2019. REUTERS / Stringer
If maintained, the improvement in business relationships may indicate that manufacturing is On the way to recovery, the fear eased that China could slip into a sharper economic downturn.
But analysts remained cautious with reference to seasonal distortions due to the long moon's New Year in February. They said a real investment and consumer demand remained soft and pushed up, potentially putting pressure on the sector.
The official Purchasing Managers Index (PMI) rose to 50.5 in March from February's three-year low of 49.2, marking the first expansion for four months, according to data published by the National Bureau of Statistics (NBS) on Sunday. The 50 mark separates the growth from contraction on a monthly basis.
Analysts surveyed by Reuters had expected that the manufacturing gauge would pick up slightly to 49.5, as the factories hit the production after the Lunar New Year holiday and rebuilt inventories ahead of a seasonal activity pickup in the spring.
Factory production grew at its fastest pace in six months in March and returned a short decline in the previous month. It rose to 52.7 from February 49.5, the highest level seen since September 2018.
Total new orders also grew faster and drove factory gate prices up to a five-month high of 51.4 and ended four-month contraction.
"The jump is likely to give a big boost to stock markets and could delay a reduction in the reserve ratio (RRR)," said Ting Lu, chief Chinese economist at Nomura.
China has announced five RRR cuts over the past year to free up more money for banks to increase lending to private companies and further cuts are expected broadly.
Things said there is limited space for manufacturing PMI to rise further, and the chance of another dip is "not small".
"All in all, although the PMI in March may to some extent alleviate the pessimistic expectations of the economy, we believe that the actual situation may not be as optimistic as reflected in this indicator," says Lianxun Securities in a note.
Export orders fell in the 10th quarter, suggesting that external demand remained sluggish and additional political cushions may be needed if the trade tensions escalate. China's trade-oriented neighbors Japan, South Korea and Taiwan have seen more signs of weaker demand, both in China and elsewhere.
"Construction that begins in the beginning of the year has led to strong domestic demand, but external demand remains weak and prospects for imports and exports are still not optimistic," economists at Huatai Securities said.
Tit-to-tat tariffs introduced by Washington and Beijing remain in place as talks continue to end a trade war that has disturbed the billions of dollars of goods between the world's two largest economies.
U.S. President Donald Trump said Friday that negotiations with China went really well, but added that he would accept nothing less than a "big deal" after top trade officials had packed two days of discussions in Beijing.
The factories cut more staff in March, with the employment sub-index still fluctuating below the no-change mark of 50. It rose marginally to 47.6 from 47.5 in February.
Due to rising labor costs and weaker sales, foreign companies from automakers to electronics companies have decided to close plants in China in recent months and increase the ghost of more redundancies.
Sony Corp closes its Beijing smartphone plant while Samsung Electronics ceased operating at one of its cell phone factories last year.
The jobless rate in February rose to 5.3 percent, approaching a two-year high.
The PMI study showed that small and medium-sized producers were still worse than large corporations, many government-managed, although their activity improved from the previous month, suggesting that politicians' efforts to channel affordable financing to the private sector gradually working.
Politicians have admitted that the economy is under pressure. Multi-year campaigns to combat debt and pollution have discouraged fresh investment, while the US-China trade war harms China's export sector and threatens even more jobs.
In response, Beijing is planning more road, rail and port expenses along with nearly 2 trillion yuan ($ 297.27 billion) in tax cuts to ease pressures on corporate balances.
The measures will take time to kick in, analysts believe that economic activity will not stabilize until mid-year. Data on Wednesday showed that industrial profits fell 14 percent in the first two months of the year, the sharpest decline since at least the end of 2011.
In the steel industry, steel mills are calling for limiting production, as the flood of products on the market complicates the profit margins in the sector.
Growth in China's service sector – which accounts for over half of the economy – picked up in March as new orders rose faster. The non-produced official purchasing manager index (PMI) rose to 54.8 from 54.3.
Construction company swung back in high gear in March with the return of hot weather. A partial reading for construction companies stood at 61.7 in March, up from 59.2 in February.
Reporting by Yawen Chen, Stella Qiu and Ryan Woo; editing Darren Schuettler