China Factory Activity Returns to Growth Despite War Fallout

ph[ui(tow(4)kj0tb9gfos]j_media_dl_1.png China's Ministry of Transport

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(Bloomberg) — China’s factory activity expanded for the first time this year despite higher energy prices and disruptions caused by the escalating conflict in the Middle East. 

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The official manufacturing purchasing managers’ index reached 50.4 in March, versus 49 last month, the National Bureau of Statistics said Tuesday. The median estimate of economists surveyed by Bloomberg was 50.1, a touch above the threshold separating growth from contraction.

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The non-manufacturing measure of activity in construction and services unexpectedly grew this month, rising to 50.1 from 49.5 in February. It’s the first official data capturing the upheaval sparked by the war, which began when the US and Israel struck Iran on Feb. 28.

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China’s manufacturing is exiting a two-month contraction after the government ramped up spending at the start of the year and as exports prove immune to pressure from abroad thanks to global demand linked to artificial intelligence. Even so, the fallout from the hostilities has already shown signs of spreading across the world economy, with multiple PMIs compiled by S&P Global for March registering declines.

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China remains vulnerable to spillovers from foreign shocks in case of a slowdown in global growth, as the Iran war sends global energy prices soaring. Many Chinese factories that rely on crude or oil-derived products as raw materials are already struggling with higher costs.

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In March, Chinese factories recorded their fastest surge in raw material costs and output prices in about four years, as crude rallied during a conflict that’s disrupting swaths of global energy supply.

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Apart from oil, a spike in the cost of non-ferrous metals such as copper and aluminum in recent months also pushed up expenses for companies. But the pace of factories’ price hikes has lagged behind the increase in their costs so far, indicating that manufacturers are opting to foot part of the bill from the shock.

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“Affected by factors such as the current geopolitical conflict in the Middle East, the prices of raw materials such as oil and chemicals have risen sharply, coupled with increased logistics costs,” NBS statistician Huo Lihui said in a statement accompanying the data release. “This month, the proportion of enterprises reporting high raw material costs and high logistics costs both increased compared to the previous month.”

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China’s official PMIs come a day before the release of a private survey of manufacturing, which tends to be more sensitive to trade activity by focusing on small and export-oriented firms. 

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Beijing’s huge strategic oil reserves and its push into renewable energy are so far helping cushion the toll of the war on the broader economy.

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But other risks abound. The US and China have started trade investigations against each other ahead of President Donald Trump’s planned state visit to Beijing in mid-May.