Factory Growth Slows in China, Clouding Recovery Prospects

Doubts remain about China’s post-Covid recovery after official data on Friday showed China’s manufacturing activity grew at a weaker pace in March.

But the country’s services sector is expanding at the fastest pace in over a decade with transportation, accommodation and construction all up since China ended its tough zero-Covid policy in early December.

The official manufacturing purchasing managers’ index (PMI) stood at 51.9, against 52.6 in February, according to data from the National Bureau of Statistics (NBS), above the 50-point mark that separates expansion and contraction.

That was slightly over expectations tipped by economists in a Reuters poll, and led to the yuan strengthening against the dollar. The February figure had grown at the fastest pace in more than a decade.

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Exports and real estate weak

China’s economic activity picked up in the first two months of 2023 as consumption and infrastructure investment drove a recovery after the end of Covid-19 disruptions and retail sales swung back to growth.

Nomura economists said the strong data suggested China’s economy had reached a “sweet spot” after the end of property tightening measures and the zero-Covid policy.

“However, amid rapidly worsening 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 fall, although the rate of decline is narrowing.

Companies face challenges including weak demand, tight availability of capital and high operating costs, and the foundations for an economic rebound need to be further consolidated, NBS said in an accompanying statement.

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

While business and consumer sentiment is starting to pick up, the manufacturing sector remains under pressure amid sluggish global demand and stubbornly high costs.

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

Official data this week showed the slump in Chinese industrial firms’ profits deepened in the first two months of the year, marking a downbeat start to the recovery.

Factory activity was hit by slowing growth in production and customer demand, with the output and new orders sub-indexes showing declines from February’s levels.

The new export order sub-index fell to 50.4 against 52.4 in February, pointing to lacklustre external demand.

Services recovery strong

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

“The strong momentum will likely continue in the coming months, as the new order index for the service sector continued 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 before, reversing a 1.8% annual fall seen in December, raising hopes of an economic revival led by consumption as flagging global demand weakens exports.

The government’s softening tone toward the private sector is also boosting market confidence.

Alibaba Group founder Jack Ma’s return and the firm’s plans for a major revamp have been taken as a signal that Beijing’s regulatory crackdown on private business is ending.

“These policy actions will help the economy to keep the strong momentum. We think GDP growth may surpass 6% this year,” Zhang said.

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