It's not only China's government saying the manufacturing sector is looking up

Photo by Kevin Frayer/Getty Images

While China’s manufacturing sector returned to growth in March, the vast majority of the improvement was due to an acceleration in activity levels in larger firms.

They grew modestly, while activity levels at smaller firms continued to contract.

Nothing demonstrates this point better than the separate Caixin-Markit manufacturing purchasing manager’s index (PMI) — a survey of small and medium-sized manufacturing firms from the private sector — which indicated that activity levels continued to contract last month.

The index printed at 49.7 in March, above the 48.0 level of February and expectations for a small increase to 48.2, although it remained below the 50 level that separates expansion from contraction.

PMI surveys measures changes in activity levels from one month to the next, with 50 signifying that activity levels were unchanged from one month earlier.

While the index is now at the highest level seen since February last year, it still suggests conditions are deteriorating, albeit fractionally.

According to the report, output increased for the first time in more than a year as a lift in domestic demand offset weak demand from abroad.

“Higher output was supported by a renewed rise in total new work,” said Markit. “Some companies commented on an improvement in underlying client demand. Weak foreign demand remained a drag on new order growth, however, with new export business falling for the fourth month in a row.”

Despite the lift in output, firms continued to reduced employee numbers as firms attempted to reduce costs.

Suggesting that deflationary pressures across the sector may be easing, Markit notes that input prices rose for the first time in 20 months, translating to firms raising output prices.

“The rate of inflation was modest overall, with a number of monitored firms commenting on higher raw material prices. In line with higher production costs, companies raised their prices charged in March. Though the rate of increase was only moderate, it was the first time that charge inflation has been recorded since July 2014,” said Markit.

He Fan, chief economist at Caixin Insight Group, believes the smaller contraction registered in March suggests the government’s attempts to stimulate the economy are working.

“All categories of the index showed improvement over the previous month. The output and new order categories rose above the neutral 50-point level, indicating that the stimulus policies the government has implemented have begun to take hold,” he said.

“However, considering that current conditions remain uncertain, the government needs to continue with moderate stimulus measures to reinforce market confidence.”

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