China's latest stimulus spend appears to be working

VCG/VCG via Getty ImagesMonetary stimulus.
  • Conditions across China’s services sector improved at the fastest pace since January 2018 in March.
  • A similar rebound in China’s manufacturing sector was also seen last month, suggesting attempts from policymakers to stimulate the economy are now starting to work.
  • New orders from home and abroad both increased, positing to a further recovery ahead.
  • Trade talks between the US and China look set to resume on Wednesday.

If the latest data from China is any guide, attempts from policymakers to stimulate the economy are now starting to work.

The rubber has now hit the road, so to speak.

Following news that activity levels across its manufacturing sector improved for the first time in March since late last year, China’s services sector has now also chimed in, logging the fastest improvement since January 2018.

The IHS-Markit China Services Purchasing Managers Index (PMI), produced in conjunction with the Caixin Insight Group, jumped to 54.4 in March in seasonally adjusted terms, lifting strongly from 51.1 in February.

This PMI measures perceived changes in activity levels across China’s services sector from one month to the next, and tens to focus on small and medium-sized firms.

A figure above 50 signals that activity levels are improving while a reading below suggests they’re deteriorating. The distance away from 50 indicates how quickly activity levels are expanding or contracting.

So based on responses received in March, activity levels improved fairly rapidly, helped by stronger demand at both home and abroad.

“Services companies registered a solid and accelerated rise in new work that was the quickest recorded for 14 months,” IHS Markit said. “New export sales also rose at the second-strongest rate since December 2017 amid reports of greater activity in international markets.”

As a lead indicator on activity levels in the future, the lift in new work suggests there may be further improvement to come in what is now the largest sector in the Chinese economy.

Combined with the improvement seen in the manufacturing sector over the same period, the IHS-Markit Composite PMI rose to 52.9 last month after seasonal adjustments, indicating the fastest growth since June 2018.

IHS Markit

The recovery in the IHS Markit reading was similar to the China Composite PMI released by the government over the weekend that revealed an improvement in both the manufacturing and services during March.

“In general, China’s economic fundamentals recovered in March, with domestic and external demand as well as manufacturing employment improving,” said Zhengsheng Zhong, Director of Macroeconomic Analysis at the Caixin Insight Group.

“However… more evidence is needed to determine whether the Chinese economy has stabilised.”

Wile fiscal and monetary policy easing from policymakers is one factor that may be supporting activity levels across the Chinese economy, a thawing in trade tensions with the United States may also explain some of the recent improvement.

On Wednesday, US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin will resume talks with Chinese Vice Premier Liu He in Washington, continuing negotiations that took place in Beijing last week.

According to CBNC, citing a story from the Financial Times, Myron Brilliant, executive vice president for international affairs at the US Chamber of Commerce, said that 90% of the trade deal is done, although he acknowledged the final 10% “remains the trickiest part of the negotiations and would require trade-offs on both sides”.

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