Activity at China’s smaller, privately-owned factories strengthened in March, after a weeks-long lockdown due to the coronavirus pandemic, data released on Wednesday showed.
The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) gave a reading of 50.1, up from 40.3 in February and well above analysts’ forecasts of 45. A figure above 50 signifies growth, while less than that represents a contraction. February’s figure was an all-time low.
The survey followed the official manufacturing PMI on Tuesday, which also overshot analysts’ expectations and returned to growth, at 52.0. That survey focuses more on larger, state-owned producers.
PMIs are gauges of sentiment rather than actual output, thus are highly sensitive to short-term fluctuations in business conditions due to the way they are collated. Researchers simply ask respondents if things are better or worse than they were the previous month.
A recovery from a torrid first two months of the year was to be expected, given most of China’s factories were closed for most – if not all – of February. However, it was also expected that smaller firms would be gloomier about the outlook.
While the vast majority of large companies in China have reopened, smaller firms have struggled to follow suit. Government data showed that 96.6 per cent of large firms had reopened as of last week, compared to 71.7 per cent of smaller companies.
The Caixin/Markit bounce, however, was attributed to rising production due to firms reopening. “However, the pandemic continued to weigh on demand conditions and supply chains, with total new work falling for the second month running and delivery times lengthening sharply,” read a press release accompanying the survey.
“Manufacturing output expanded, but orders declined. Since February 21, the epidemic has worsened outside China,” said Zhengsheng Zhong, chief economist at CEBM Group.
“The worsening situation overseas is another blow to manufacturing demand. The subindex for total new orders stayed in contractionary territory for the second straight month in March, while the gauge for new export orders was still way below levels seen before the epidemic.”
The survey was conducted between March 12 and March 23 and 500 manufacturing companies were polled.
Firms reported expanding stock inventories and backlogs of work, a reflection of demand slumps elsewhere in the economy. However, manufacturers were not increasing their raw material inventories, another sign that they expect to produce less. More finished goods, meanwhile, languished in warehouses due to disrupted transport networks.
Falling raw material prices, a boon for small manufacturers in good times, arguably do not bode well for the wider economy, while output prices also remained negative, despite some improvement, signalling weaker consumption among China’s population.
Weak foreign demand and labour market strains will hold back the pace of recovery
Martin Rasmussen, Capital Economics
Business surveys in Japan, South Korea, Vietnam and numerous other Asian markets also slumped to long-term lows on Wednesday, while Goldman Sachs cut its forecast of US economic growth in the second quarter to minus 34 per cent.
This suggests that factory owners in China should be wary of an incoming hit to overseas demand, caused by the lockdown of many consumer markets around the world.
“The PMI strengthened last month from February’s abysmal levels and suggested that the contraction in activity has already bottomed out,” said Martin Rasmussen at Capital Economics. “But weak foreign demand and labour market strains will hold back the pace of recovery.”
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