SG News (Straits Times)

Factory activity in China unexpectedly expands in March

By June 22, 2020 No Comments
Employees working on a battery production line at a factory in eastern Anhui province on Monday. Factory activity in China rebounded last month from a record low in February, but analysts warn of a further period of struggle due to the rapid spread o

Employees working on a battery production line at a factory in eastern Anhui province on Monday. Factory activity in China rebounded last month from a record low in February, but analysts warn of a further period of struggle due to the rapid spread o

BEIJING • Factory activity in China unexpectedly expanded last month from a collapse the month before, but analysts caution that a durable near-term recovery is far from assured as the global coronavirus crisis knocks foreign demand and threatens a steep economic slump.

China’s official Purchasing Managers’ Index (PMI) rose to 52 last month from a plunge to a record low of 35.7 in February, the National Bureau of Statistics (NBS) said yesterday, above the 50-point mark that separates monthly growth from contraction. Analysts polled by Reuters had expected the March PMI to come in at 45.

The NBS attributed the surprise rebound in PMI to its record low base in February and cautioned that the readings do not signal a stabilisation in economic activity.

That view was echoed by many analysts, who warn of a further period of struggle for China’s businesses and the broader economy due to the rapid spread of the virus across the world, the unprecedented lockdowns in several countries and the almost near certainty of a global recession.

“This does not mean that output is now back to its pre-virus trend. Instead, it simply suggests that economic activity improved modestly relative to February’s dismal showing, but remains well below pre-virus levels,” said Mr Julian Evans-Pritchard, senior China economist at Capital Economics, in a note.

The pandemic’s sweeping impact on production was underlined in two of Asia’s main export engines, Japan and South Korea.

In Japan, industrial output rose at a slower pace in February, while production in South Korea contracted the most in 11 years.

Economists are already forecasting a steep contraction in China’s first-quarter gross domestic product (GDP), with some expecting a year-on-year slump of 9 per cent or more – the first such contraction in three decades.

Economist Nie Wen at Shanghai-based Hwabao Trust said that given weak export orders, rising stockpiles and soft prices, the underlying issue facing Chinese manufacturers has shifted to a lack of market demand, from production shutdowns forced by the Chinese authorities.

The survey’s sub-index of manufacturing production picked up to 54.1 last month from February’s 27.8, but new export orders received by Chinese manufacturers were still mired in contraction, after ticking up to 46.4 from 28.7 in February.

Manufacturers are still facing big operational pressures, the survey showed, with over half of the respondents reporting a lack of market demand and 42 per cent reporting financing issues, both up from the previous month.

“The biggest problem facing China’s economy in the second quarter is the slumping foreign demand,” said Mr Nie, adding that the authorities may roll out more policies on top of the billions of dollars pumped into the financial system since February to boost domestic consumption and tide over the shrinking overseas demand.

Markets reacted positively to the PMI survey, with Asian stocks rising as investors seemed relieved by the rare good news as the pandemic showed few signs of abating.

China’s yuan, however, barely budged, reflecting analysts’ views that a sustainable bounce in manufacturing looked some way off despite a slowdown in China’s virus infections from its peak in February.

Beijing, at great costs to the economy, had imposed draconian quarantine rules and travel restrictions to curb the pandemic that has killed more than 3,000 in the country. While life for millions of people has started to slowly return to normal, the pace of business resumptions has been constrained by China’s efforts to guard against a second wave of infections from abroad.

The coronavirus has wreaked havoc along global supply chains and severely hurt foreign demand amid tight lockdowns in Europe, the United States and a number of other key economies where daily life has ground to a halt.

Already, Chinese exporters are seeing overseas orders being scrapped as the worldwide spike in infections and deaths has forced many of the nation’s trading partners to slow or suspend production. Globally the outbreak has claimed the lives of over 38,000 people with more than 800,000 infections.

China should not set an economic growth target this year given the heightened uncertainty, and avoid having to resort to “flood-like stimulus” to meet the goal, a central bank adviser said.

The service sector, which accounts for 60 per cent of China’s GDP, also saw an expansion in activity, with the official non-manufacturing PMI rising to 52.3 from 29.6 in February, a separate NBS survey showed.

Analysts warn that the outbreak could have a lingering impact despite the government loosening restrictions in recent weeks, as many people remain worried about the possibility of new infections or fret about job security and potential cuts to wages as the economy struggles.

REUTERS

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