Active Stocks
Tue May 28 2024 15:03:07
  1. Tata Steel share price
  2. 174.95 -0.31%
  1. HDFC Bank share price
  2. 1,527.50 -0.03%
  1. ITC share price
  2. 429.35 -0.50%
  1. State Bank Of India share price
  2. 830.95 -0.38%
  1. Infosys share price
  2. 1,469.40 -0.15%
Business News/ Economy / China’s recovery picks up as stimulus measures sink in
BackBack

China’s recovery picks up as stimulus measures sink in

wsj

China’s sprawling manufacturing sector returned to expansion in March after five months of decline, adding to signs of a stabilizing economy as recent stimulus measures start to kick in.

An official gauge of China’s manufacturing activity moved into expansion territory in March following months of contraction. (AFP) Premium
An official gauge of China’s manufacturing activity moved into expansion territory in March following months of contraction. (AFP)

BEIJING—China’s sprawling manufacturing sector returned to expansion in March after five months of decline, adding to signs of a stabilizing economy as a recent string of stimulus measures starts to kick in.

An official gauge of China’s factory activity edged up to 50.8 from February’s 49.1, the country’s National Bureau of Statistics said Sunday, beating a forecast of 50 by economists polled by The Wall Street Journal. The 50 level separates expansion from contraction.

Sunday’s upbeat reading comes after a bundle of indicators for the January-February period showing the world’s second-largest economy started off the year on a solid footing, led by the manufacturing sector, with exports topping expectations and industrial profits returning to growth.

While the recent run of positive data will help lift the immediate pressure on China’s leaders, who recently set a growth target of around 5% for the year, many economists say authorities still need to roll out more policy support to hit that relatively lofty goal. A drawn-out property slump has shown no signs of bottoming out, and deflationary pressures are likely to persist.

In the latest sign of distress in the real-estate sector, troubled property giant Country Garden Holdings said Thursday in a surprise announcement that it will miss a deadline for reporting annual results and it needs more time to assess its financial situation.

Meanwhile, another industry leader, Shenzhen-based China Vanke, saw its net profit tumble 46% last year, the biggest drop since its 1991 listing. “During the period of excessive scale expansion, some investment judgments were over-optimistic, and it will take some time for these projects to be digested," the developer said in a stock exchange filing Thursday.

With monetary policy constrained by tepid borrowing demand and concerns around profits of squeezed banks and a weak currency, fiscal stimulus is widely expected to take the lead role in driving demand this year. Despite recent statements from China’s central bank pointing to further monetary easing, economists say imminent cuts to banks’ required reserves or to interest rates are unlikely, citing uncertainty around the timing of rate cuts by the U.S. Federal Reserve.

Already, China’s leaders have grown concerned that recent moves to loosen monetary policy have led to excessive liquidity that isn’t being funneled into the real economy. Earlier this month, Premier Li Qiang warned that cash shouldn’t be circulating in the financial system for no good reason.

Speculation had grown in recent days that Chinese leaders were contemplating an aggressive boost to liquidity, after the publication of months-old remarks by leader Xi Jinping. In a speech to financial regulators in October, Xi called for the central bank to enrich its monetary policy toolbox and gradually step up trading treasury bonds in its open-market operations.

Most economists, however, have shrugged off the likelihood of such a policy, given the constraints and limitations of more monetary easing. They say U.S.-style “quantitative easing," in which a central bank buys government bonds, is unlikely in China.

“In the same speech," Morgan Stanley economists told clients, “Beijing made hawkish comments that the deleveraging process requires a tighter grip on money and credit supply, which we believe indicates continued preference for austerity."

The People’s Bank of China is prohibited by law from directly buying treasury bonds in the primary market, and it has generally refrained from such purchases in the secondary markets over the past two decades.

Xi doesn’t appear to be calling for quantitative easing or aggressive stimulus, but rather expanding the central bank’s options for open-market operations, which should help increase the bank’s flexibility, UBS economist Wang Tao told clients Thursday.

Wang said China’s central bank still has relatively ample room to ease monetary policy with traditional measures, which means unconventional policy tools are unlikely.

In any case, with signs of a nascent rebound in the economy, there may be less need in the short run for any emergency interventions by Beijing.

The Sunday release of the factory-sector data showed the production subindex bouncing back to expansion, finishing at 52.2 in March from 49.8 in February. The gauge for employment, meanwhile, rose to 48.1 from February’s 47.5, suggesting improved appetite from manufacturers to hire more workers.

The subindex for total new orders rose to 53 from February’s 49, while that for new export orders improved to 51.3 from February’s 46.3, surpassing the 50 threshold for the first time in a year and pointing to improved global demand for Chinese goods.

China’s nonmanufacturing PMI, which covers both services and construction activity, rose to 53 in March, compared with 51.4 in February, the statistics bureau said separately on Sunday. The subindex tracking services activity rose to 52.4 from February’s 51.0, while the construction subindex rose to 56.2 from 53.5 in February.

China reported last week that outbound shipments rose 7.1% in the January-February period from a year earlier. Despite the upbeat figures, Chinese officials have repeatedly warned that foreign trade this year still faces extremely severe conditions, pointing to the rising prospect of protectionism against manufactured products, especially Chinese-made electric vehicles, one of the country’s most promising export industries.

As part of efforts to tilt the economy away from heavy infrastructure and property investment, Beijing has been pouring money into China’s vast manufacturing sector as it looks to develop high-tech sectors such as electric vehicles and renewable energy. That has stoked fears that overproduction of such products will prompt Western governments to consider hefty tariffs.

During China’s annual legislative session in early March, Li emphasized manufacturing-sector upgrades and technological innovation, a policy mix that economists say would likely further exacerbate any concerns about overcapacity.

While Beijing has acknowledged the concerns, the solutions that Chinese authorities have adopted “will likely center on retiring obsolete capacity and letting the most uncompetitive companies shut down while continuing to support capacity expansion, innovation, and exports in others," analysts at New York-based Rhodium Group wrote in a note Tuesday.

Xiao Xiao contributed to this article.

You are on Mint! India's #1 news destination (Source: Press Gazette). To learn more about our business coverage and market insights Click Here!

Next Story footLogo
Recommended For You