China's Economic Recovery Continued in March - Barron's

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A worker at a factory in Nantong in China's eastern Jiangsu province on March 30, 2021.

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Multiple gauges of China’s economy painted a mixed picture this week, showing a surge last month in the services sector and tepid expansion in manufacturing.

China’s March official manufacturing Purchasing Managers’ Index (PMI)—released Wednesday by the National Bureau of Statistic (NBS)—rose to 51.9, up 1.3 percentage points compared with February’s 50.6. That was the highest recording for the year, and welcome news after February’s dip.

But the independent Caixin China General Manufacturing PMI, released Thursday, showed weaker results, with manufacturing falling to 50.6 in March from 50.9 the previous month, its weakest expansion since April 2020.

While the official manufacturing PMI focuses heavily on large companies and state-owned enterprises, the Caixin index is separate from the government and includes smaller private firms as well.

For both indexes, a reading above 50 indicates expansion, while below 50 points to contraction.

Meanwhile, the services sector showed unequivocal strength, with China’s official nonmanufacturing PMI—which tracks sentiment in the services and construction sectors—leaping to a four-month high of 56.3 in March from 51.4 in February. That was far above analysts expectations of 52.

The subindex for business activities was particularly bullish in March, with railway and air transport, telecommunications, broadcasting and television satellite transmission services, software and IT services, and financial services all above 60, Zhao Qinghe, a senior NBS statistician, said in an official analysis.

As for manufacturing, Zhao said that after February’s Lunar New Year holiday, “The recovery of production accelerated, and the manufacturing industry rebounded significantly.”

Tian Yun, vice director of the Beijing Economic Operation Association, told Chinese state-run media that “overseas markets, particularly the U.S.’s stimulus plans, which resulted in price inflation, are driving up demands. China, with its strong manufacturing capabilities, is benefiting from such a trend.” 

Contrasting that optimism, Caixin senior economist Wang Zhe was quoted as saying, “The growing inflationary pressure limits the room for future policies and is not a good thing for sustaining an economic recovery in the post-epidemic period.”

The subindexes in the official manufacturing PMI showed that new exports orders rose to 51.2 in March from 48.8 in February. Yet other sectors faltered, with steel PMI falling 0.7 percentage points to 47.9, due largely to production restrictions. Within the steel gauge, new export orders, finished steel inventory, and the purchase price index of raw materials all dropped in March.

Meanwhile, the employment subindex for manufacturing finally moved back into expansion, hitting 50.1 after February’s 48.1 contraction. Yet the employment index for services continued to shrink at 49.7, up from 48.4 in February.

Independent experts were mixed about what the data portent. Economists at both Nomura and Capital Economics said in notes Wednesday they expected moderated activity in manufacturing in the coming months.

Yet Michael Pettis, a professor of finance at Peking University and a senior fellow at the Carnegie-Tsinghua Center for Global Policy, told Barron’s that “because of the big expected reversal of last year’s terrible contraction in what Beijing calls ‘high quality’ growth (mostly consumption, exports, and business investment tied to both), I expect GDP to grow this year by 6-7%, and most or all of this growth to represent ‘high quality’ growth.” The manufacturing and service PMIs will continue to do well for many months, he said.

Albert Park, head and chair professor at Hong Kong University of Science and Technology’s economics department, told Barron’s that China’s March PMI numbers “reflect a healthy continued economic recovery in China. The larger increase in the PMI for nonmanufacturing sectors, which is tied more closely to domestic demand, suggests that Chinese consumers are spending more. The less robust increase in the PMI for manufacturing is still healthy but may reflect uneven recovery in the rest of the world, bottlenecks in international trade, and changing demands of foreign consumers as the pandemic eases.”

What all this means for China’s 2021 GDP remains unclear. At March’s all-important legislative summit, Premier Li Keqiang surprised observers by announcing a modest annual growth target of “above 6%.” Outside experts have been much more bullish.

The International Monetary Fund in January set its forecast for 8.1%. UBS recently upgraded its outlook to 9.0% from 8.2%, saying the U.S. stimulus package will lift the American economy and boost demand for Chinese exports. Barclays went even further, bumping its expectations from 8.4% to 9.4% on stronger-than-expected first-quarter performance in the Chinese economy.

China’s benchmark stocks indexes rose Thursday, with the Shanghai Composite up 0.71% and the large-cap CSI 300 up 1.24%—though they are down more than 6% and 13%, respectively, from their 2021 high in February.

Tanner Brown covers China for Barron’s and MarketWatch.

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