China’s factory activity expands at fastest pace in 13 months, but ‘too soon to let our guards down’ for economic recovery
- Caixin/S&P Global manufacturing purchasing managers’ index (PMI) expanded for the fifth consecutive month in March, hitting a 13-month high
- Analysts said the economic recovery should continue in the near-term thanks to stimulus, but that a sustained period is still needed to restore confidence
Despite a private gauge of China’s manufacturing activity hitting a 13-month high last month, which helped push up business confidence, analysts said “it is too soon to let our guards down” for the overall economic recovery, and that sustained policy support is needed amid persistent headwinds at home and abroad.
Expansion in manufacturers’ output and new orders accelerated last month, the Caixin survey showed, while external demand also picked up, pushing the gauge for new export orders to its highest level since February 2023.
Analysts at Capital Economics said on Monday that the recovery should continue in the near-term thanks to stimulus, but would not prove durable as the economy would weaken again by the end of the year.
“Once policy support is scaled back, probably later this year, structural headwinds mean the economy is likely to slow again,” they said.
Businesses’ confidence also rose to its highest point since April 2023, as growing market demands resulted in elevated sentiment as companies planned for investment and expansion.
The Caixin PMI focuses more on small and medium-sized private manufacturing enterprises, while the official PMI represents a broader spectrum of the manufacturing sector, including large state-owned enterprises.
“A drop in raw material prices reduced production costs for manufacturers, providing leeway for them to lower prices amid fierce market competition,” said Wang Zhe, a senior economist at Caixin Insight Group.
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But Wang conceded that downward economic pressures persist, including subdued employment, low prices and insufficient effective demand, underscoring the need to further boost domestic and external demand.
However, companies were cautious about adding employees, and despite improvements, the relevant subindex has remained negative since August, signalling shrinking workforce as companies underwent reorganisations and cost controls.
For now, we will take March’s PMI improvement as a win, but it is too soon to let our guards down
“A sustained period of healthy economic indicators is needed to boost businesses’ confidence in the economy’s recovery,” she said.
“However, global borrowing costs are set to remain elevated through most of this year, which will cap export orders. Expectations that the run of deflation will not last for long will also put a strain on demand for Chinese exports. Further, fragile domestic conditions will challenge the prospects of a consumption revival in the country.”
“For now, we will take March’s PMI improvement as a win, but it is too soon to let our guards down.”
