China's economy shows renewed signs of recovery, with the three major indices returning to expansion territory.

As work and production resume faster after the Spring Festival and macroeconomic policies continue to take effect, China’s economy is showing signs of warming.

According to data released by the National Bureau of Statistics on March 31, in March, the manufacturing Purchasing Managers’ Index (PMI), the non-manufacturing Business Activity Index, and the composite PMI output index all returned to the expansion range, at 50.4%, 50.1% and 50.5% respectively. These were up by 1.4 percentage points, 0.6 percentage points and 1.0 percentage point from the previous month, respectively, indicating that China’s economic sentiment has rebounded.

Zhang Liqun, a special analyst with the China Federation of Logistics and Purchasing, said that the PMI in March rebounded notably. This is due to both seasonal factors and the fact that, after the Two Sessions, confidence in China’s economy across all fronts has clearly increased. To keep pushing to implement the arrangements related to the Two Sessions, we should continue to strengthen counter-cyclical adjustment of macroeconomic policies, do a solid job of securing major government project investment, and steadily drive increases in corporate orders, a rebound in production, more jobs, and expanded consumer demand—so as to ensure a good start for the “15th Five-Year Plan.”

Wang Qing, chief macro analyst at Oriental Jincheng, told First Financial that the March manufacturing PMI rose sharply into the expansion range, and macroeconomic conditions show an across-the-board rebound trend. This is mainly attributable to comprehensive resumption of work by enterprises after the holiday, stronger-than-expected export performance, new-momentum industries maintaining a relatively rapid development pace, and also early-year steady-growth policies boosting infrastructure investment significantly.

Improvement in manufacturing demand

In March, the impact of the Spring Festival was basically gone. Enterprises fully resumed work and production, bringing renewed economic vitality. Meanwhile, the “15th Five-Year Plan” and the relevant arrangements of the national “Two Sessions” were gradually advanced, and manufacturing market demand was released relatively well.

In March, the index for new manufacturing orders was 51.6%, up by 3 percentage points from the previous month. After running below 50% for two consecutive months, it returned to the expansion range, with a relatively clear month-on-month increase. External demand also improved markedly. The index for new export orders in March was 49.1%, up by 4.1 percentage points from the previous month.

Enterprises’ perception of insufficient market demand also eased noticeably. Data show that the share of manufacturing enterprises reflecting insufficient market demand was 48.5%, down by 6.6 percentage points from the previous month, falling below 50% for the first time since July 2022.

On the production side, as the Spring Festival ended, employees of enterprises returned to their posts one after another. With a rebound on the demand side, manufacturing production recovered steadily. The production index was 51.4%, up by 1.8 percentage points from the previous month, and after briefly falling below 50%, it returned to the expansion range.

By industry, new-momentum industries’ production activities have continued to trend stable-to-higher. The production index for equipment manufacturing rose by 1.3 percentage points from the previous month to above 52%, and has remained at 50% or above for 20 consecutive months. The production index for high-tech manufacturing fell by 1.7 percentage points from the previous month, but still stayed at nearly 53%, and has also been at 50% or above for 20 consecutive months.

Wen Tao, an expert at the China Federation of Logistics Information Center, said that in March, the indices for employed personnel in equipment manufacturing and high-tech manufacturing rose by 1.7 and 1.0 percentage points from the previous month, respectively, both reaching close to the 50% level—clearly higher than the manufacturing sector overall. This indicates that employment in new-momentum industries is stabilizing and rebounding, and the employment structure is becoming more optimized.

By enterprise size, PMIs for large, medium, and small enterprises all rebounded. The PMI for large enterprises was 51.6%, up by 0.1 percentage point from the previous month, with business conditions rising slightly while staying steady. The PMIs for medium and small enterprises were 49.0% and 49.3%, respectively, up by 1.5 and 4.5 percentage points from the previous month, indicating a significant improvement in business conditions.

In March, the index of expected production and operating activity was 53.4%, up by 0.2 percentage point from the previous month, suggesting that manufacturing enterprises’ confidence in near-term market development strengthened somewhat. From an industry perspective, industries such as specialized equipment, automobiles, and railway, shipping, and aerospace equipment had expected indices of production and operating activity above 56.0%, in a relatively high-business-conditions range. Relevant enterprises are more optimistic about future industry development.

Looking ahead, Wang Qing expects the manufacturing PMI index in April to show a certain degree of decline. Historical data show that, excluding extreme years, over the past decade the average April manufacturing PMI fell by 0.5 percentage points compared with March. This is mainly because the short-term effect of concentrated resumption of work in March fades, and in April manufacturing production and operating activities will gradually return to a normal rhythm.

Raw material prices rise faster

In March, with market demand released fairly well after the holiday, enterprises’ production recovered steadily, driving the expansion of raw-material purchasing activities and thereby strengthening support for raw material prices. The procurement quantity index was 50.9%, up by 2.7 percentage points from the previous month; after running below 50% for two consecutive months, it returned to the expansion range. The purchased price index was 63.9%, up by 9.1 percentage points from the previous month, a marked increase, indicating that manufacturing raw material prices rose faster in the short term.

Driven jointly by the release of end demand and rising raw material prices, manufacturing prices for finished goods also rose faster in the short term. The ex-factory price index was 55.4%, up by 4.8 percentage points from the previous month. It has remained in the expansion range for three consecutive months and hit a new high since April 2022.

Wen Tao said that in March, the rebound of supply and demand in the manufacturing market and the linked rise in market prices indicate that the economic rebound has good synergy and that the favorable foundation is being consolidated. It is worth noting that, while raw material prices are being driven by demand, cost-push factors should also be watched. Changes in the situation in the Middle East in March introduced disruptions to the operation of global energy supply chains, and their impact on China’s manufacturing raw material prices has also become evident. In particular, cost increases were relatively more obvious in petroleum and chemical-related industries, and these were transmitted through supply chains to the midstream and downstream sectors.

Data show that in March, price increases in basic raw material industries were relatively significant. The purchased price index for basic raw material industries rose by more than 14 percentage points from the previous month to a high level of above 70%. The ex-factory price index also rose by 12 percentage points from the previous month to nearly 64%. Raw material prices rose rapidly, leading to a synchronized increase in procurement costs of raw materials in midstream and downstream industries such as equipment manufacturing, high-tech manufacturing, and consumer goods manufacturing—and ultimately pushing up their finished-goods prices as well.

Huolihui, chief statistician at the Service Industry Survey Center of the National Bureau of Statistics, said that affected by factors such as current geopolitical conflicts in the Middle East, prices of relevant raw materials such as petroleum and chemicals rose sharply. Combined with higher logistics freight rates, in March the proportions of enterprises reporting high raw material costs and high logistics costs both increased compared with the previous month.

Wang Qing believes that the shock effect of the evolution of the situation in the Middle East on the global economy will be further transmitted to the domestic market in April. Data show that in March, the composite PMI indices of developed economies such as the United States, Europe, Japan, and the United Kingdom all declined to varying degrees. This could spill over to China’s exports. In addition, after the sharp increase in upstream raw material prices for petroleum and petrochemicals domestically, and against the backdrop of insufficient effective demand in the market, some manufacturing enterprises may slow their production pace.

China Galaxy Securities said that if the situation in the Middle East remains tense, oil prices, chemical product prices, and logistics costs will remain high, and the pressure from imported inflation could be further transmitted to the PPI, which may also constrain enterprise profit recovery and the policy easing space to some extent. However, if the situation in the Middle East eases in the short term, shocks to upstream raw material prices will tend to converge. Since ex-factory prices have some stickiness due to earlier increases, enterprise profits are likely to improve at least in stages, thereby推动ing the repair of business expectations and the rebound in production willingness. This will also help some industries gradually move out of the “involution” vicious cycle of price competition and sustained profit compression.

Structural recovery in the services sector

For non-manufacturing, in March China’s non-manufacturing Business Activity Index was 50.1%, up by 0.6 percentage point month-on-month.

By industry, the construction business activity index was 49.3%, up by 1.1 percentage points month-on-month; the services business activity index was 50.2%, up by 0.5 percentage point month-on-month.

Wu Wei, an expert at the China Federation of Logistics Information Center, said that after the Spring Festival, activities related to infrastructure investment and the production-oriented services sector were somewhat initiated, lifting the overall business conditions of the non-manufacturing sector. The business conditions in consumer-related services showed some pullback, and geopolitical conflicts in the Middle East brought cost-increase pressure to some industries.

In March, the construction business activity index was 49.3%, up by 1.1 percentage points from the previous month, indicating that after the Spring Festival, construction business conditions increased compared with the previous month. Business activity indices in industries including rail transport, telecommunications broadcasting and television and satellite transmission services, money and finance services, and insurance were all in relatively high business conditions ranges above 55.0%, with total business volume growing quickly. Meanwhile, after the Spring Festival, business activity indices in retail, accommodation, and catering—industries related to residents’ travel and consumption—were below the critical point, and market activity weakened somewhat.

Wang Qing analyzed that after the Spring Festival holiday, with enterprises fully resuming work, the business conditions in transport and logistics industries related to production rose significantly, offsetting the impact of declines in demand for residents’ tourism, accommodation, dining, and so on. In addition, digital economy and artificial intelligence are developing rapidly, and new-momentum industries such as information services have continued to be in relatively high business conditions, which provides important support for the services sector’s PMI index rising into the expansion range in March. However, at the beginning of the year, the real estate industry continued its adjustment, and residents’ consumption still needs further stimulus, which brings some drag on overall services sector business conditions.

Wu Wei said that overall business conditions in the non-manufacturing sector have edged upward, and two important areas also need further attention. First, under the influence of the high base for Spring Festival consumption, business conditions in consumption-related industries such as retail, accommodation, catering, and culture, sports, and entertainment have declined to some extent. Their business activity indices fell from the previous month to varying degrees, and it is worth watching how strongly subsequent consumer demand will be released and how much rebound it will bring to these industries.

Second, geopolitical conflicts in the Middle East have made cost-increase pressure visible for the civil engineering construction industry, wholesale trade, and various transportation industries. The price indices for their inputs rose significantly from the previous month on average, and it is important to monitor the subsequent trend of input price indices in these industries.

(This article comes from First Financial)

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