Slower China factory activity growth challenges economic recovery prospects

China’s manufacturing sector showed slower growth in March, according to official data, raising concerns about the strength of post-COVID recovery. Global demand is weaker, and there is a property market downturn.

The services sector, on the other hand, had the fastest expansion in almost 12 years due to the end of China’s zero-COVID policy boost for transportation, accommodation, and construction.

The official manufacturing purchasing managers’ index (PMI) was 51.9, slightly lower than February’s 52.6, as shown in data from the National Bureau of Statistics (NBS), still above the 50-point that signals expansion and contraction on a monthly basis. Economists who participated in Reuters polls expected the rise to be 51.5. Meanwhile, February saw the fastest pace of growth in more than a decade.

The year’s first two months showed an increase in China’s economic activity driven by recovery in consumption and infrastructure investment after COVID-19 disruptions. Retail sales also went back to growth.

Nomura’s economists confirmed that the data indicates that China’s economy has reached a “sweet spot” after the zero-COVID policy and property tightening measures came to an end. However, they remain cautious amid rapidly worsening geopolitical tensions and financial uncertainties outside of China.

While business and consumer sentiments are beginning to improve, the manufacturing sector remains under pressure due to sluggish global demand and high costs. Export remains weak, and there is a continued decline in new home sales, but the rate of fall is slowly reducing.

To support the economy’s recovery, China’s central bank unexpectedly reduced the amount of cash banks need to hold in reserve.

Official data from this week revealed that Chinese industrial firms’ profits had declined in the first two months of the year, indicating a bleak start of the recovery due to slowing growth in customer demand and production. The output and new orders sub-indexes showed a downturn from February levels, with the new export order sub-index at 50.4, indicating lacklustre external demand.

Nevertheless, the non-manufacturing PMI jumped to 58.2%, the highest level since May 2011, because of the services sector’s strong momentum.

The government’s move towards a softer attitude toward the private sector also increased market confidence. The country set around 5% as a modest target for economic growth this year after a slow 3% showing in 2022, which is one of the weakest performances in almost 50 years.

(Reporting by Liangping Gao and Ryan Woo; Editing by Jamie Freed)

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