China's manufacturing sector expanded rapidly in March, confounding expectations of a contraction and easing fears about a potential hard landing for the world's second-biggest economy.
The official purchasing managers' index (PMI), an important gauge of factory activity, rose to an 11-month high of 53.1 in March from 51.0 in February, beating expectations of 50.05 as new orders rose to the highest level since 2010.
“The PMI increase was significant. New orders led the improvement, jumping 4.1 pts to 55.1 pts – the highest level since 2010; new orders are highly correlated with output two months later, which bodes well for manufacturing recovery by the middle of Q2, ” a note from Credit Agricole Said.
However, a separate private survey of smaller factories over the weekend set a different direction. The HSBC manufacturing PMI was revised slightly higher to 48.3 from 48.1 in the preliminary flash estimate, but still shows a drop from 49.6 in February. The index remained below 50 for the fifth straight month and recorded its lowest average reading in three years in the first quarter.
“March data showed manufacturing production falling for the fourth time in the past five months. Factory output was reduced largely in response to lacklustre demand from domestic and external markets,” the report said.
“Final PMI results confirm a further slowdown of growth momentum, weighed on by weakening new export orders. As inflation pressures continue to ease, weaker export growth is likely to prompt further easing measures,” said Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC.
The two manufacturing PMIs currently paint very different pictures of the world’s second biggest economy. The strong official PMI probably exaggerates the strength due to seasonality as some analysts caution that the underlying picture may not be that strong.
“The number will likely cheer financial markets on Monday by dispelling talk that China is sliding towards a hard landing, although the figure is not as impressive after accounting for seasonal changes,” Nomura economist Zhang Zhiwei told Reuters.
I don't think the economy has improved a lot. If you take out the seasonality factor, this year's jump is less than the historical average. From that perspective, it's not a very strong signal, said Zhang.