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

Ask AI · How will the situation in the Middle East affect China’s economic recovery?

With work and production resuming faster after the Spring Festival and macroeconomic policies continuing to be rolled out effectively, China’s economy is showing signs of warming again.

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 figures were up by 1.4, 0.6, and 1.0 percentage points month-on-month, respectively, indicating an improvement in overall economic sentiment in China.

Zhang Liqun, a special analyst at the China Federation of Logistics and Purchasing, said that the March PMI index rebounded noticeably, reflecting both seasonal factors and a clear increase in confidence across various aspects in China’s economy after the two sessions. To keep efforts going and ensure the implementation of the two sessions’ relevant arrangements, it is necessary to further increase the力度 of macroeconomic policy counter-cyclical adjustments, focus on securing government’s major project investment, and continuously drive increases in enterprise orders, improved production, more jobs, and expanded consumer demand—so as to ensure a good start for the “15th Five-Year Plan.”

Qing Wang, chief macro analyst at Oriental Jincheng, told First Financial that the March manufacturing PMI rose sharply into the expansion range, showing a broad-based rebound in macroeconomic business conditions. This is mainly attributable to enterprises fully resuming work after the holiday, stronger-than-expected export performance, new-momentum industries maintaining a relatively fast development pace, and the early-year policy push to stabilize growth driving a significant acceleration in infrastructure investment.

Improvement in manufacturing demand

In March, the impact of the Spring Festival had basically faded. Enterprises fully resumed work and production, business vitality picked up, and meanwhile the “15th Five-Year Plan” and relevant arrangements from the National “Two Sessions” were gradually advanced, resulting in a fairly good release of market demand for manufacturing.

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

Enterprises’ sense of insufficient market demand also eased significantly. Data show that the share of manufacturing enterprises reflecting insufficient market demand was 48.5%, down 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 returned to their jobs in phases. With market demand picking up, manufacturing production rebounded steadily. The production index was 51.4%, up 1.8 percentage points from the previous month. After briefly falling below 50%, it returned to the expansion range.

By industry, new-momentum industries’ production activities continued to grow steadily. The production index for equipment manufacturing rose by 1.3 percentage points from the previous month to above 52%, and it 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 it still stayed at nearly 53%, and likewise has remained at 50% or above for 20 consecutive months.

Wu Wei, an expert at the China Logistics Information Center, said that in March, the indices for practitioners in equipment manufacturing and high-tech manufacturing increased by 1.7 and 1 percentage point from the previous month, respectively, and both rose to close to the 50% level—clearly higher than the overall manufacturing level—indicating that employment in new-momentum industries is stabilizing and rebounding, and that the employment structure is moving toward optimization.

By enterprise size, PMI improved across large, medium, and small firms. Large enterprises’ PMI was 51.6%, up 0.1 percentage point from the previous month, with business conditions rising steadily. PMIs for medium-sized and small enterprises were 49.0% and 49.3%, respectively, up 1.5 and 4.5 percentage points from the previous month, showing a clear improvement in business conditions.

In March, the index for expected production and operating activity was 53.4%, up 0.2 percentage points from the previous month. Manufacturing enterprises’ confidence in near-term market development increased somewhat. By industry, industries such as specialized equipment, automobiles, rail transport, and telecommunications, radio and television, and satellite transmission equipment, had production and operating activity expectation indices above 56.0%, indicating relatively high levels of business optimism among related enterprises about future industry development.

Looking ahead, Wang Qing expects the manufacturing PMI index in April to decline to some extent. Historical data show that, excluding extreme years, over the past decade the April manufacturing PMI index averaged a 0.5 percentage point drop compared with March. This is mainly because after the short-term effects of concentrated work resumption in March fade, manufacturing production and operating activity in April will gradually return to a normal rhythm.

Raw material prices accelerate upward

In March, with post-holiday market demand released fairly well and enterprise production rebounding steadily, purchasing activities for raw materials expanded, thereby strengthening support for raw material prices. The purchasing quantity index was 50.9%, up 2.7 percentage points from the previous month. After running below 50% for two consecutive months, it returned to the expansion range. The purchasing price index was 63.9%, up 9.1 percentage points from the previous month—an obvious increase—indicating that manufacturing raw material prices are accelerating upward in the short term.

Driven jointly by the release of terminal demand and rising raw material prices, manufacturing finished goods prices also accelerated upward in the short term. The ex-factory price index was 55.4%, up 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 in manufacturing market supply and demand and the linked rise in market prices show that the economic rebound has good coordination, and the favorable foundation has been further consolidated. It is worth noting, however, that while raw material prices are supported by demand-driven factors, cost-push factors also need to be considered. Changes in the Middle East situation in March introduced disruptions to the global energy supply-chain operations, and impacts on China’s manufacturing raw material prices also became evident. In particular, cost increases were relatively more pronounced in oil refining and petrochemical-related industries, and these were transmitted through the supply chain to midstream and downstream sectors.

Data show that in March, price increases in basic raw materials industries were relatively significant. The purchasing price index in basic raw materials 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%. With basic raw material prices rising rapidly, the raw material procurement costs for equipment manufacturing, high-tech manufacturing, and consumer goods manufacturing in the midstream and downstream sectors increased in sync, and ultimately pushed up their finished goods prices.

Hong Hui, chief statistician at the Service Industry Survey Center of the National Bureau of Statistics, said that affected by factors such as geopolitical conflicts in the Middle East, prices of related raw materials including oil and chemicals surged significantly. Combined with higher logistics freight rates, in March the shares of enterprises facing both high raw material costs and high logistics costs both increased compared with the previous month.

Wang Qing believes that the shock effect of the Middle East situation on the global economy will further transmit into China in April. Data show that in March, the composite PMI indices of developed economies such as the United States, Europe, Japan, and the UK all saw declines to varying degrees, which could spill over to China’s exports. In addition, after a large surge in domestic upstream raw material prices such as oil and petrochemicals, in a context of insufficient effective market demand, some manufacturing enterprises may slow production schedules.

China Galaxy Securities said that if the Middle East situation remains tense and oil prices, chemical product prices, and logistics costs stay at high levels, the pressure from imported inflation could further transmit to the PPI and put certain constraints on profit restoration for enterprises and the room for policy easing. However, if the Middle East situation eases in the short term, the shock from upstream raw material prices will likely converge, while ex-factory prices may show some stickiness due to the earlier upward move; in that case, enterprise profits are expected to improve intermittently and thereby help repair business expectations and raise production willingness, which would also help some industries gradually move out of the “involution” vicious cycle of price competition and continuously compressed profits.

Structural recovery in the services sector

For the non-manufacturing sector, in March China’s non-manufacturing business activity index was 50.1%, up 0.6 percentage points quarter-on-quarter.

By industry, the construction business activity index was 49.3%, up 1.1 percentage points from the previous month; the services business activity index was 50.2%, up 0.5 percentage points from the previous month.

Wu Wei, an expert at the China Logistics Information Center, said that after the Spring Festival, activities related to infrastructure investment and productive services were somewhat activated, driving an overall improvement in non-manufacturing business conditions. Business conditions in consumption-related services fell somewhat, and geopolitical conflicts in the Middle East created cost-increase pressure for some industries.

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

Wang Qing analyzed that after the extended Spring Festival holiday, with enterprises resuming work comprehensively, the business conditions of transportation and logistics industries related to production surged significantly, offsetting the impact of demand declines from post-holiday residents’ tourism and consumption in accommodation and catering. In addition, as digital economy and artificial intelligence are developing rapidly, new-momentum industries such as information services have continued to maintain high levels of business conditions, which provides important support for the services-sector PMI in March rising into the expansion range. However, at the beginning of the year, the real estate industry’s adjustment continued, and residents’ consumption still needs further strengthening, which has weighed to some extent on overall services-sector business conditions.

Wu Wei said that overall non-manufacturing business conditions are trending upward, and at the same time two important areas need further attention. First, under the impact of a high base during the Spring Festival consumption season, the business conditions of consumption-related industries such as retail, accommodation, catering, and cultural and sports entertainment declined to some extent; business activity indices fell to different degrees compared with the previous month. It is worth watching how strongly subsequent consumption demand release can drive a rebound in these industries.

Second, geopolitical conflicts in the Middle East have exposed some cost-increase pressure on the civil engineering and construction sector, the wholesale sector, and various transportation industries. The input price indices of the above industries rose noticeably compared with the previous month. Pay attention to the subsequent trend of input price indices in the related industries.

(This article comes from First Financial)