March 30, 2020 / 7:10 AM / 2 months ago

China's factory activity seen recovering in March, but still in contraction after virus shock

BEIJING (Reuters) - Activity in China’s vast manufacturing sector likely remained in contraction in March, though it was set to stabilize slightly from the coronavirus-led collapse that virtually paralyzed the world’s second-biggest economy.

FILE PHOTO: A textile worker is seen on a fabric production line at a factory in Qingdao, Shandong province, China February 14, 2020. China Daily via REUTERS/File Photo

Analysts have warned that any recovery would be shallow as the coronavirus has rapidly spread to many countries, leaving the global economy vulnerable to a deep recession.

China’s official manufacturing Purchasing Manager’s Index (PMI) is forecast to rise to 45 in March, from a record low of 35.7 a month earlier, according to the median forecast of 18 economists polled by Reuters.

Despite the partial improvement, the reading is still below the 50-point mark that separates monthly growth from contraction, with the pace of contraction equaling that during the depth of the global financial crisis.

Beijing, at great costs to the economy, had imposed draconian quarantine rules and travel restrictions to curb the spread of the coronavirus that has killed more than 3,000 in the country. But as locally transmitted infections dwindle, most businesses have reopened and life for millions of people has started to slowly return to normal.

Yet, the pace of business resumptions has been constrained by Beijing efforts to guard against a second wave of infections from abroad. Production levels at China’s small and medium-sized companies, a major employment sector, were at 76% by Saturday, with the rate of workers returning to their posts in the textile, auto, machinery industries varying from 70% to 90%, the vice industry minister Xin Guobin told a press conference on Monday.

“Because of the relatively slow business resumption rate and slumping external demand, we expect deeply negative growth for almost all activity data in March,” said Nomura analysts in a note to clients on Friday, adding that they expect first-quarter gross domestic product to shrink by 9% from a year earlier.

They now predict China’s second-quarter GDP growth to have stalled.

A survey last week from U.S.-based consultancy China Beige Book showed that China’s economy suffered through an “eye-popping” first quarter as a coronavirus epidemic hammered business activity even as firms were supposed to be going back to work.

EXPORT ORDERS DRY UP

Early in the outbreak, factory suspensions forced by Beijing to curb the spread of the virus had squeezed labor supplies and sent exporters scrambling to fulfill orders. Now, the reverse is happening - overseas orders are being scrapped as the pandemic ravages the economies of China’s trading partners and some factories have started to let people go.

China’s foreign trade could further worsen from January-February period, the vice industry minister Xin Guobin told a press conference on Monday, warning that the pandemic is set to cause a shock to the country’s supply chains and exports.

The country’s overseas shipments fell 17.2% in January-February from the same period a year earlier, marking the steepest fall since February 2019.

Profits at China’s industrial firms slumped in the first two months of the year to their lowest in at least a decade, official data showed on Friday, with the mining, manufacturing and power sectors all seeing sharp falls.

Faced with uncertain economic prospects, the ruling Communist Party’s Politburo said on Friday it would step up macroeconomic policy adjustments and pursue more proactive fiscal policy to revive activity. Beijing is implementing $344 billion of mainly fiscal measures.

The People’s Bank of China unexpectedly cut the rate on reverse repurchase agreements by 20 basis points on Monday, the largest in nearly five years, to shore up the economy.

The private-sector Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) due on Wednesday - which analysts say focuses more on smaller export-driven firms - is also expected to show a similar contraction at 45.8, compared with February’s sharpest contraction on record at 40.3.

The official PMI and its sister survey on the services sector will be released on Tuesday.

Reporting by Stella Qiu and Ryan Woo; Editing by Shri Navaratnam

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