50.4%! Manufacturing PMI rises above the threshold for the first time this year. Why?

The reporter of 每经｜Zhang Hong    Editor of 每经｜Chen Junjie

On March 31, the National Bureau of Statistics released the operating conditions of China’s Purchasing Managers’ Index (PMI) for March.

The data show that in March, the manufacturing PMI, the non-manufacturing business activity index, and the composite PMI output index all returned to the expansion range, at 50.4%, 50.1%, and 50.5% respectively—up by 1.4, 0.6, and 1.0 percentage points from the previous month. All three indices returned to above the critical point for the first time since this year.

Price indices rebounded significantly. The main raw materials purchase price index and the factory-gate price index were 63.9% and 55.4% respectively, up by 9.1 and 4.8 percentage points from the previous month. By industry, in sectors such as oil, coal, and other fuel processing, and chemical raw materials and chemical products, both price indices were above 70.0%.

Overall Macro-Economic Sentiment Rebounds Across the Board

As one of the leading indicators widely used internationally to monitor macroeconomic trends, the PMI has strong predictive and early-warning roles. When the PMI is above 50%, it reflects that the overall economy is expanding compared with the previous month.

(Image source: Website of the National Bureau of Statistics)

Why did all three indices in March rebound sharply at the same time?

Wang Qing, chief macro analyst at 东方金诚, said in a text interview with reporters of 《每日经济新闻》 (hereinafter referred to as the 每经 reporters) that both supply and demand sides in manufacturing saw significant improvement. The main reasons are threefold: first, seasonal factors. This year’s Spring Festival fell in February. Historical data show that excluding extreme years, over the past decade, the manufacturing PMI index averaged a rebound of 0.9 percentage points in the month after the Spring Festival. This is because production after the holiday is pushed up notably. After the reopening of the industrial chain, demand for manufacturing raw materials and intermediate goods also rises accordingly, thereby driving a substantial increase in market demand. It can be seen that in March, the production index accelerated by 1.8 percentage points to 51.4%, while the new orders index—representing market demand—rose sharply by 3.0 percentage points to 51.6%. It should be noted that this year the Spring Festival holiday was extended by one day, which led to a clear low-base effect on the February manufacturing PMI, and is also one reason why the rebound magnitude of this index in March was greater than the historical average.

Second, exports were relatively strong. In March, the new export orders index rose sharply by 4.1 percentage points to 49.1%. This is an important reason behind the sharp rise in the new orders index for the month. High-frequency data show that in March, exports from Vietnam and South Korea continued to maintain high growth rates. In recent times, global manufacturing has remained in an expansion state, and external demand overall has been relatively strong. Thus, although the export year-on-year growth rate of China’s exports in March will decline noticeably due to the Spring Festival timing effect, exports still have a clearly boosting effect on domestic manufacturing sentiment.

Finally, the government work report for March set the tone that this year’s macro policies will continue with an even more proactive and enterprising stance. Investment growth turned positive in January and February, infrastructure investment growth surged significantly, and high-tech manufacturing industries such as chips maintained a relatively fast development momentum—all of which provide strong support for the improvement in manufacturing sentiment in March.

The services PMI index was 50.2%, up 0.5 percentage points from the previous month. Mainly because after the long Spring Festival holiday, with businesses fully resuming work, the business climate of transport and logistics industries related to production rose sharply, offsetting the impact brought by the decline in residents’ travel and spending on accommodations and catering after the holiday. In addition, with digital economy and artificial intelligence developing rapidly, new-momentum industries such as information services have continued to maintain a high level of business momentum, which provides important support for the services PMI index in March to rise into the expansion range. However, at the beginning of the year, the real estate sector continued to adjust, and residents’ consumption still needs to be further boosted, which has weighed on overall services business sentiment to some extent.

(Image source: Website of the National Bureau of Statistics)

Overall, driven jointly by factors including the full resumption of work by enterprises after the holiday, relatively strong exports, the sustained fast development momentum of new-momentum industries, and the increased push from steady-growth policies at the beginning of the year—along with the sharp acceleration of infrastructure investment—China’s manufacturing PMI rose sharply into the expansion range in March, and macroeconomic sentiment rebounded across the board.

Manufacturing Profits Shift Upstream

What is the reason for the sharp rebound in price indices?

Wang Qing said that the impact of the situation in the Middle East on China’s macroeconomy is mainly reflected in prices. Data show that the two price indices within the March manufacturing PMI both rose significantly. Among them, the factory-gate price index rose sharply by 4.8 percentage points from 50.6% last month to 55.4%. Meanwhile, the main raw materials purchase price index rose from 54.8% to 63.9%, up by 9.1 percentage points. The increase was significantly higher than the factory-gate price index, mainly because prices of related raw materials such as oil and chemicals surged sharply, along with higher logistics costs. It is expected that in March, the PPI (producer price index for industrial producers) year-on-year will turn from -0.9% last month to around 0.5%.

How will manufacturing production be affected?

Wang Qing pointed out that a sharp rise in import crude oil prices, while pushing up the PPI and alleviating the situation of subdued prices, will also lead to a significant increase in manufacturing production costs, directly squeezing the profit margins of domestic enterprises.

From March data, Yang Chang, chief expert at the Institute of Public Policy and Governance of Shanghai University of Finance and Economics, told the 每经 reporters that raw materials purchase prices were 63.9% (prior value 54.8%), up by 9.1 percentage points, and it is still on the business-conducive line, indicating that upstream prices are still rising with a clearly accelerated pace. The factory-gate prices were 55.4% (prior value 50.6%), up by 4.8 percentage points. The difference between the raw materials purchase price index and the factory-gate price index was 8.5 percentage points (prior value 4.2 percentage points), pointing to profits shifting upstream.

Looking ahead, Wang Qing said he expects the manufacturing PMI index in April to fall to some extent, estimating it will drop to around 49.8%, down by 0.6 percentage points from the previous month. Historical data show that, excluding extreme years, over the past decade the manufacturing PMI index averaged a decline of 0.5 percentage points in April. The main reason is that after the concentrated resumption of work following March’s post-holiday period, manufacturing production and business operations in April will return to normal rhythms.

More importantly, the impact of the Middle East situation’s evolution on the global economy will further transmit to the domestic market in April. Data show that in March, the composite PMI indices of developed economies such as the United States, Europe, Japan, and the United Kingdom all recorded declines to varying degrees, which may spill over to China’s exports. In addition, after upstream raw materials prices such as domestic oil and petrochemicals rose significantly, and under a backdrop of insufficient market effective demand, some manufacturing companies will slow down their production schedules. However, this year’s steady-growth policies have been advanced to start pushing earlier, with infrastructure investment growth surging sharply. In addition, fields of new quality productive forces represented by high-tech manufacturing will maintain a relatively fast development momentum, which will become two important support points for manufacturing sentiment in April. Overall, in the short term, the trend of the manufacturing PMI index will mainly depend on three factors: first, the duration of the conflict in the Middle East; second, China’s export resilience; and third, the trend in China’s real estate market and the timing and intensity with which various steady-growth policies are rolled out.

Cover image source: Kong Saisi