China factory activity unexpectedly expands, but economy unable to get rid of virus shock

Factory activity in China unexpectedly expanded in March from a collapse the month before, but analysts caution that a durable near-term recovery is definately not assured as the global coronavirus crisis knocks foreign demand and threatens a steep financial slump.

China's official Purchasing Managers' Index (PMI) rose to 52 in March from a plunge to an archive low of 35.7 in February, the National Bureau of Statistics (NBS) said on Tuesday, above the 50-point mark that separates monthly growth from contraction.

Analysts polled by Reuters had expected the March PMI to can be found in at 45.0.

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

That view was echoed by many analysts, who warn of an additional period of struggle for China's businesses and the broader economy as a result of rapid spread of the virus across the world, the unprecedented lockdowns in several countries and the almost near certainty of a worldwide recession. "This will not mean that output is currently back again to its pre-virus trend. Instead, it simply shows that economic activity improved modestly in accordance with February's dismal showing, but remains well below pre-virus levels," said Julian Evans-Pritchard, senior China economist at Capital Economics, in an email to clients.

Economists are already forecasting a steep contraction in China's first quarter gross domestic product, with some expecting a year-year slump of 9% or even more - the first such contraction in three decades.

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

The survey's sub-index of manufacturing production found to 54.1 in March 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 remain facing big operational pressures, the survey showed, with over half of the respondents reporting too little market demand and 42% reporting financing issues, both up from the previous month.

"The biggest problem facing China's economy in the second quarter may be the slumping foreign demand," said Nie, adding that authorities may roll out more policies on top of the vast amounts of dollars pumped into the economic climate since February to improve domestic consumption and tide over the shrinking overseas demand.

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

China's yuan, however, didn't budge, reflecting analysts' broad views a sustainable bounce in manufacturing activity looked some way off despite a slowdown in China's coronavirus 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 which has killed more than 3,000 in the country. But as locally transmitted infections dwindle, most businesses have reopened and life for millions of individuals has began to slowly go back to normal.

Yet, the pace of business resumptions has been constrained by China's efforts to protect against another wave of infections from abroad.

Grim outlook 

The coronavirus, which originated late this past year in China, has wreaked havoc along global supply chains and severely hurt foreign demand amid tight lockdowns in Europe, america and several other key economies where lifestyle has ground to a halt.

Already, Chinese exporters are seeing overseas orders being scrapped as the worldwide spike in coronavirus infections and deaths has forced lots of the nation's trading partners to slow or suspend production. Globally the outbreak has claimed the lives of over 37,000 persons with more than 770,000 infections.

China shouldn't set an economical growth target this year given the higher level of uncertainty from the coronavirus pandemic and avoid needing to resort to "flood-like stimulus" to meet up the target, a central bank adviser said.

China's service sector activity also expanded, with official non-manufacturing PMI coming in at 52.3, from 29.6 in February, another NBS survey showed.

The service sector now makes up a more substantial share of China's economy than at the time of the 2002/03 SARS coronavirus epidemic, accounting for approximately 60% of the country's Gross Domestic Product (GDP).

Analysts warn the outbreak could have a lingering impact despite the government loosening restrictions in recent weeks, as much people remain concerned about the likelihood of new infections or worrying about job security and potential cuts to wages as the economy struggles.

China's urban jobless rate hit 6.2% in February, up one percentage point from the end of 2019, with analysts estimating about 5 million jobs lost in January-February period.

"The situation remains volatile as the trajectory of the COVID-19 virus outbreak in a number of key economies is still unpredictable," ANZ analysts said in a note.