Caixin View: Room For Cautious Optimism After Manufacturing Turnaround
The latest manufacturing data indicates China's economy might have turned the corner. Business confidence improved on signs of progress in U.S.-China trade negotiations, and last year's stimulus policies are also starting to have an effect. Sentiment is fickle and trade negotiations are hard to predict — but indications that more financing is reaching the smaller businesses that need it are certainly encouraging.
Beating expectations, China's manufacturing sector jumped into expansionary territory in March according to both government and private surveys — although only just. The higher a reading is above 50, the faster the expansion. Readings below 50 indicate contraction.
• China’s official manufacturing PMI, released by the National Bureau of Statistics on Sunday and focusing on heavy industry, jumped to 50.5 in March from 49.2 the month before, marking the highest level in six months.
• The Caixin China General Manufacturing PMI, which focuses on light industry, jumped to 50.8 in March, the highest it's been since July, after contracting for three months.
• For the first time since October 2013, the employment subindex in the Caixin survey moved above 50, indicating that a majority of respondents said they were taking on more people than they were laying off.
• In Caixin's survey, new orders received by Chinese manufacturers increased for the second consecutive month, and new export orders rose after falling in February; the subindex that measures optimism towards the 12-month production outlook rose to a ten-month high, with businesses expecting better market conditions both in China and abroad.
• Markets surged in response to the better-than-expected data, with the benchmark Shanghai Composite Index jumping 2.58% on Monday to a ten-month high. The Shenzhen Component Index also jumped 3.64%.
This improvement in the manufacturing sector looks to have been driven in part by businesses taking a more positive view of U.S-China trade negotiations, where the end may be in sight. We've seen several signs of progress in negotiations in recent weeks, albeit mainly from the Chinese side — most recently, China announced it would continue to not subject American autos and car parts to additional tariffs, after a previous suspension expired on Monday. The official Xinhua News Agency said over the weekend that negotiations on Friday went well, although it gave few details.
A deal doesn't necessarily mean the end of tariffs. Moody's Analytics chief economist Mark Zandi told Caixin last week that he expects a deal to be made but current tariffs to remain in place, as has been threatened by U.S. President Donald Trump. But the uncertainty brought about by continuing trade frictions is probably a bigger drag on the manufacturing sector than the tariffs themselves — meaning negotiations that end with tariffs still in place could be regarded as progress.
But as we said above, it's best to take any signs of trade negotiation progress with a pinch of salt. More important are signs that an unprecedented series of efforts to help small and private businesses access financing, rolled out since mid-2018, are starting to have some effect. We've argued before that most of these measures didn't address the core structural problem — that amid a continuing crackdown on financial risks, banks still have insufficient reason to make loans to China's smaller companies, many of which lack collateral. Clearly some of these measures are helping to some extent. But in the long run more fiscal support for smaller businesses, in the form of tax and fee cuts, is necessary.
Such support has been pledged in the form of 2 trillion yuan ($300 billion) of cuts revealed in March. It's still too early to tell how these promised cuts will be implemented, and whether they'll be enough to create structural improvements for struggling private businesses in the long term. For now though, China's scramble over the last few months to support its smaller firms and ease its financing environment seems to have borne some fruit.
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