China’s March factory activity sparks hope for recovery, but clouds of uncertainty persist

A wave of optimism swept through China’s manufacturing sector in March as its activity surged to its highest level of growth in over a year, with firms resuming and accelerating production following the Lunar New Year holiday, according to an official survey.

The survey also showed a remarkable boost in business confidence, hitting its peak in almost a year, driven by a surge in orders both domestically and internationally.  

This positive momentum comes as a breath of fresh air for Beijing, which has been grappling with a sluggish property market and fluctuating investor sentiment in the world’s second-largest economy. 

The Caixin/S&P Global manufacturing Purchasing Managers’ Index (PMI) for March soared to 51.1, surpassing analysts’ expectations and extending its growth streak to five consecutive months.  

“Sizeable rises in the PMIs in March are consistent with improved economic momentum and/or the easing of sentiment effects that have weighed on the surveys recently. Either way, they add to wider evidence of a stimulus induced pick-up in activity recently,” said Zichun Huang, China Economist at Capital Economics. 

“Given the near-term tailwinds from stimulus, growth should continue to do reasonably well in the near-term. But once policy support is scaled back, probably later this year, structural headwinds mean the economy is likely to slow again.” 

Echoing this sentiment, the National Bureau of Statistics on Sunday reported a manufacturing PMI of 50.8, its highest level in a year, underlining growth supported by a surge in export orders. 

The upbeat atmosphere is further buoyed by recent data revealing better-than-expected export and retail sales figures, painting a promising picture for China’s economic prospects.  

Despite facing hurdles such as a slowdown in the real estate sector and uncertain investor sentiment, China’s government remains steadfast, setting an ambitious economic growth target of around 5% for the current year, showcasing determination in tackling economic challenges head-on. 

“China’s near-term challenges and long-term uncertainties are plentiful, but the widespread pessimism towards the Chinese economy and markets feels excessive,” Lynn Song, Chief Economist, Greater China at ING. 

“We think the country’s in a necessary transition rather than in any long-term decline. Understanding the challenges and timescale is key for investors,” he added.