China’s manufacturing sector witnessed growth in March, marking the first expansion in six months, according to an official factory survey. This development brings some relief to policymakers amidst the ongoing crisis in the property sector, which continues to weigh on the economy and confidence. The official purchasing managers’ index (PMI) rose to 50.8 in March, up from 49.1 in February, surpassing the median forecast of 49.9 in a Reuters poll and crossing the 50-mark that separates growth from contraction.
Although the growth rate was moderate, it represented the highest PMI reading since March of the previous year when the momentum from the relaxation of stringent COVID-19 restrictions began to taper off. Zhou Maohua, an analyst at China Everbright Bank, stated that the improvement in domestic supply and demand, along with the recovery of homeowner and business confidence, has led to increased willingness to consume and invest.
New export orders show positive upturn
The PMI data revealed a positive upturn in new export orders, ending an 11-month decline. However, employment continued to shrink, albeit at a slower pace. Encouraging indicators in recent times suggest that the world’s second-largest economy is gradually regaining stability, prompting analysts to revise their growth forecasts upwards for the year. Since the lifting of COVID-19 restrictions in late 2022, policymakers have grappled with persistent economic sluggishness, exacerbated by a deepening housing crisis, mounting local government debts, and weakening global demand.
China Beige Book, an advisory firm, remarked in a note last week that the March data indicates the economy is poised for a strong end to the first quarter. They highlighted that hiring has shown its longest stretch of improvement since late 2020, with both manufacturing and retail sectors experiencing growth. However, the significant downturn in China’s property sector continues to hinder overall growth, testing the financial health of heavily indebted local governments and state-owned banks.
Read more: China’s Consumer Price Index drops 0.8 percent in January amid export pressures
Setting 5 percent economic growth target for 2024
The official non-manufacturing PMI, which includes services and construction, rose to 53 in March, up from 51.4 in February, representing the highest reading since September. Premier Li Qiang announced an ambitious economic growth target of around 5 percent for 2024 during the annual meeting of the National People’s Congress. However, analysts argue that policymakers will need to implement further stimulus measures to achieve this target, as they cannot rely on the low statistical base of 2022 that inflated the growth data in 2023.
Citi recently revised its economic growth forecast for China this year from 4.6 percent to 5.0 percent, citing positive recent data and policy implementation. On March 1, China’s cabinet approved a plan aimed at promoting large-scale equipment upgrades and consumer goods sales. The head of the country’s state planner stated earlier this month in a news conference that the plan has the potential to generate annual market demand of over 5 trillion yuan ($691.63 billion).
Many analysts express concerns that unless policymakers take steps to reorient the economy towards household consumption and market allocation of resources, moving away from the heavy reliance on infrastructure investments seen in the past, China may face Japan-style stagnation later in the decade.
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