China’s Recovery Strengthens as Spending, Construction Surge

China’s economic recovery gathered pace in March, with manufacturing continuing to expand and services activity and construction picking up strongly.

(Bloomberg) — China’s economic recovery gathered pace in March, with manufacturing continuing to expand and services activity and construction picking up strongly.    

The manufacturing purchasing managers’ index eased to 51.9 from 52.6 in February, the National Bureau of Statistics said Friday, but remained above the 50 mark that signals expansion from the previous month.

A non-manufacturing gauge of activity in both the services and construction sectors surged to 58.2 in March, the highest level since May 2011. The construction sub-index reached the highest level since records began in 2012.

The PMIs are the first official indicators of economic activity for the month, showing the recovery is strengthening after stringent pandemic restrictions were dropped and Covid infection waves eased. Economists expect a rebound in consumer spending and stronger government spending on infrastructure to help drive up growth in the world’s second-largest economy to 5.3% this year from just 3% in 2022.

Stocks in China and Hong Kong rose amid broad gains in Asia. A gauge of Chinese shares listed in the financial hub jumped more than 2%, leading the regional advance. The currency edged higher, with the offshore yuan jumping 0.4% to 6.8470 per dollar.

“The PMI indicates China’s economic recovery is on track,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management. “The strong momentum will likely continue in the coming months, as the new order index for the service sector continued to rise.”

The NBS said services activity picked up “as the effects of local governments measures to promote consumption kicked in” and households showed willingness to spend and travel. Warmer whether also helped to get construction projects going across the country, it said.

What Bloomberg Economics Says…

Another jump in China’s official non-manufacturing PMI further into expansion in March shows spending on services and government investment in infrastructure driving the economy’s recovery. This is a good sign — domestic demand is kicking in. That will be important. A slowdown in manufacturing evident in Friday’s data could deepen as global growth slows.

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Chang Shu and David Qu

Premier Li Qiang said at this week’s Boao Forum in the southern island province of Hainan that economic growth in March likely strengthened from the first two months of the year. Consumption and investment picked up and employment and prices were “broadly stable,” he said, adding market expectations improved “notably.”

He sought to soothe foreign investor concerns over investing in China as tensions with the US intensify, pledging that the country will be “an anchor for world peace.” He also vowed to roll out new measures to broaden market access and improve the business environment.

The PMI data “indicate the recovery in China is gaining traction, led by services sector while manufacturing is likely not as bad as expected,” said Ho Woei Chen, economist at United Overseas Bank Ltd. in Singapore. For monetary policy, the implication is that interest rates will likely be on pause, although another cut to the reserve requirement ratio is possible, she said.

The growth outlook remains uncertain though, with car sales falling this month and global trade weakening, according to a set of early indicators tracked by Bloomberg. 

Also, property developers remain pessimistic about the outlook for the sector despite recent signs of a stabilization in prices and sales, while unemployment remains relatively high, weighing on the consumer rebound.

–With assistance from Chester Yung, Shikhar Balwani and Wenjin Lv.

(Updates with market reaction.)

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