Key Manufacturing Gauge in China Improves, Raising Hopes the Worst Is Over

China’s National Bureau of Statistics (NBS) reported that the Purchasing Managers Index (PMI) for manufacturing rose to 50.2 points in March, from 49.0 in February. A figure above 50 indicates expansion.

It’s the first time in eight months that the official PMI has been at or higher than 50 points. The agency also said that the non-manufacturing PMI, which has been above 50 points as the services sector continues to grow, jumped to 53.8 points from 52.7 points the month before.

“It’s quite a significant pickup,” OCBC Bank economist Dongming Xie told the Wall Street Journal. “But it doesn’t mean we’re going back to a very bullish sentiment. Challenges remain, such as overcapacity and high debt, that you can’t solve in one or two days.”

Stabilization drivers

Still, China’s stock markets have shown signs of stabilizing in recent days as the US signaled it would not raise interest rates as fast as originally anticipated and the renminbi’s fall in value against the US dollar appears to have tapered off.

The NBS had also earlier reported that industrial profits have increased 4.8% year-on-year in the first two months of 2016, the first improvement in 18 months. This is despite a 14.5% fall in the earnings of large state-owned industrial enterprises.

The profit rise came from private enterprises (7.5%), foreign-funded enterprises (6.4%), and companies funded from Hong Kong, Macau and Taiwan (5.6%).

The government’s stimulus measures, which include heightened infrastructure spending, and an improving property market are also believed to be driving the upturn.

“Prices rose 22% year on year in China’s largest real-estate markets in February, according to a private survey, compared with a 19% rise in January even as many smaller property markets continue to struggle,” the Wall Street Journal reports.

Tepid growth

But GDP growth is not likely to return to the robust numbers of past years, given the structural adjustment in the economy towards domestic consumption and services. That adjustment process will be choppy, with some economists projecting 5% growth in the near future, below government planners’ target of at least 6%.

The growth in the property sector is not seen as sustainable, for example. “We expect growth in nationwide home sales to further narrow to 0%-5% year-on-year in 2016, despite an about 22.5% year-on-year rise in cumulative national contracted sales for the 12 months ended February 2016,” said Moody’s Investor’s Service in a recent report.

“The strong sales in the first two months of 2016 were partly driven by the low base for the same period last year, and we expect sales will moderate for the rest of 2016.”

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