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China's February PMI data signal policy and consumption resilience

Jimmy Zhu

Editor's note: Jimmy Zhu is the chief strategist at Fullerton Research. The article reflects the author's opinions and not necessarily the views of CGTN.

Amid the swirling uncertainty of the global economy, some of China's manufacturing data is showing promising signs of recovery, gaining traction and momentum. Buoyed by robust service activities and policy support, the domestic manufacturing industry is likely to continue to find support.

China's manufacturing sector has once again demonstrated growth momentum, with the Caixin manufacturing purchasing managers' index (PMI) rising to 50.9 in February. This marks the fourth consecutive month that the Caixin PMI has remained above the crucial 50-point threshold, indicating expansion in the sector and underscoring China's ability to weather challenges and navigate towards a path of sustained growth.

Over the past several months, China has swiftly implemented measures to support business, stimulate domestic demand and promote industrial upgrading. The results are now evident, with manufacturing activity gaining traction and contributing to the overall economic revival.

However, it is worth mentioning that China's official manufacturing PMI stood at 49.1 last month, with new export orders falling to 46.3 from January's 47.2. The slowdown in manufacturing growth observed in key economies such as the euro area and the U.S. poses challenges for China's export-oriented manufacturing sector. The decrease in manufacturing PMI figures, particularly in Germany, a major trading partner with China, indicates weakening demand for Chinese exports in these markets.

Furthermore, the uncertainty surrounding the U.S. economy, including slowing job growth and potential consumer spending reductions, presents additional headwinds for China's manufacturing sector. A slowdown in the U.S. economy could dampen demand for Chinese exports, impacting key industries such as electronics, textiles and machinery.

Thus, the challenging external environment still requires more pro-growth measures to support domestic demand. By prioritizing policies that stimulate consumption, boost household incomes and foster innovation, China can enhance its resilience to external shocks and lay the foundation for sustainable long-term growth.

By stimulating demand for higher-quality products, encouraging investments in innovation and technology and boosting consumer spending, the government initiatives are likely to have a substantial impact on the Chinese manufacturing sector.

The focus on equipment upgrading and consumer goods replacement suggests a shift towards higher-quality products in the market. This could lead to increased demand for advanced machinery, technology and innovative consumer goods.

As manufacturers strive to meet the demand for upgraded equipment and high-quality consumer goods, there may be a boost in production activities, leading to a potential increase in factory output and PMIs in the coming months.

China's ongoing transition towards higher value-added manufacturing and innovation-driven growth could mitigate the impact of external headwinds on the sector. Investment in advanced technologies such as artificial intelligence (AI), robotics and renewable energy could enhance China's competitiveness in global markets and drive future growth in the manufacturing sector.

Impact of monetary support on factory activities

The People's Bank of China's monetary easing measures also serve to mitigate headwinds facing the Chinese economy. By providing liquidity and lowering borrowing costs, these measures aim to support overall economic stability and growth, which in turn benefit the manufacturing sector.

The reduction in reserve requirement ratio (RRR) for banks means that financial institutions will have more liquidity available to lend to businesses, including manufacturers. With lower reserve requirements, banks are encouraged to extend credit to support investment and expansion projects in the manufacturing sector.

Additionally, the recent cut in loan prime rate reduces borrowing costs for businesses and mortgage loans, making it more affordable for the private sector to access credit for working capital, capital expenditure and other financing needs.

Lower financing costs incentivize manufacturers to invest in new machinery, upgrade technology and expand capacity. With easier access to credit and cheaper borrowing rates, manufacturing firms may accelerate their investment plans to enhance productivity, efficiency and competitiveness.

Increased investment in the manufacturing sector can stimulate demand for machinery, equipment and other capital goods, benefiting upstream industries and suppliers within the manufacturing supply chain.

Resilient service PMI supports factory activities

China's non-manufacturing PMI rose to 51.4 in February, compared with 50.7 in January. Expansion in the non-manufacturing sector, particularly in services, signals improving consumer confidence and spending. This is a positive sign for overall economic health, as the service sector plays a significant role in driving domestic demand and employment.

A huge surge in holiday travel and consumption are major factors behind these solid readings. China's travel activity and spending jumped above pre-COVID-19-pandemic levels during the recent Chinese New Year holiday, with 474 million domestic trips made during the eight-day festival, a 34.3 percent jump from a year earlier, according to data released by the country's Ministry of Culture and Tourism.

Tourists spent nearly 632.7 billion yuan on domestic holiday trips, a 47.3 percent year-on-year jump, data showed. This positive sentiment can translate into increased investment and production activity in the manufacturing sector as businesses become more optimistic about future demand prospects.

The surge in domestic trips and holiday spending reflects growing consumer confidence and willingness to spend, indicating a rebound in consumer demand. This is particularly encouraging for the manufacturing sector, as increased consumer spending typically leads to higher demand for goods and services across various industries.

The uptick in travel and holiday spending can also stimulate demand along the supply chain, benefiting manufacturers of intermediate goods and raw materials used in tourism-related industries. This increased demand for inputs can have a positive cascading effect on overall manufacturing activity.

As manufacturers of intermediate goods and raw materials experience increased demand from tourism-related industries, they may expand their production capacities and invest in new equipment and facilities to meet rising order volumes.

The uptick in economic activity driven by increased demand from tourism-related industries can lead to job creation and income growth in the manufacturing sector. As manufacturers ramp up production to meet heightened demand, they may need to hire additional workers, thereby contributing to overall employment levels and economic growth.

As China charts its course toward sustainable growth, the resilience of its manufacturing sector offers a glimmer of hope amid a complex global landscape. As we look ahead, the positive momentum seen in both manufacturing and non-manufacturing sectors provides a strong foundation for China's economic trajectory in 2024.

(Cover via CFP)

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