Beijing - Activity in China's
manufacturing sector unexpectedly expanded at the fastest pace
in nearly 5 years in March, adding to evidence that the world's
second-largest economy has gained momentum early this year as
construction booms.
But while factory output accelerated and new orders from
home and abroad improved, economists are increasingly
questioning how long China's solid growth can be sustained.
Over a dozen cities have announced fresh measures in March
to cool the overheated property market, while the export outlook
is threatened by US President Donald Trump's protectionist
rhetoric.
For now, though, China's factories appear to have shifted
into higher gear, encouraged by the strongest profit growth in
six years.
China's official Purchasing Managers' Index (PMI) rose to
51.8 in March from the previous month's 51.6, data showed on
Friday.
That was the strongest reading since April 2012 and well
above the 50-point mark that separates growth from contraction
on a monthly basis. Economists had expected 51.6.
Manufacturers also stopped shedding jobs in March for the
first time in nearly five years as profitability improved. A
prolonged slump in the sector and Beijing's recent campaign to
cut excess capacity in "smokestack" industries such as steel
have put millions out of work.
In an encouraging sign that China's economic growth is also
becoming more balanced and broad based, activity in the services
sector accelerated last month. The official non-manufacturing
Purchasing Managers' Index (PMI) rose to 55.1, the highest since
May 2014, a separate survey showed.
The March activity readings and a raft of upbeat data for
January and February point to solid growth early in 2017.
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China's economy likely expanded 6.8 percent in the first
quarter from a year earlier, in line with the previous quarter,
said Zhang Yiping, an economist at Merchants Securities. China
will release the first-quarter data on April 17.
Analysts polled by Reuters in January had expected growth
would start to cool this quarter, and even the government has
set a less aggressive full-year growth target of 6.5 percent.
Unsustainable?
China's better-than-expected performance so far may be
largely due to a surprise rebound in home sales and strong
government infrastructure investment, which have added fresh
impetus to a months-long construction boom that has lifted
demand for materials from cement to steel.
Factory output accelerated in March, with the sub-index
rising to 54.2 from 53.7 in February. Highlighting the strength
of the building boom, a measure of the construction industry
stood at a robust 60.5, compared to 60.1 in February.
Total new orders - which cover domestic and export demand - also showed improvement, rising to 53.3 from February's 53.
But economists continue to have worries.
Apart from additional government curbs on property
purchases, the central bank has embarked on cautious policy
tightening to rein in the risks from a rapid build-up in debt.
It has raised money market and short- and medium-term
interest rates on special loans several times already this year.
"Today's PMI readings suggest that China's economy continued
to perform well in March, though we doubt the current strength
will be sustained for much longer," Capital Economics said in a
note.
"The correction in the property market still has much
further to run which, in combination with policy tightening,
will drive a slowdown in investment and industrial activity
during the coming quarters."
The construction rally may already be starting to show signs
of fatigue, said Jonas Short, head of the Beijing office of
investment bank NSBO, pointing to a drop in new construction
orders to the lowest since August 2016.
Inventories of iron ore at China's ports have swelled to the
highest since at least 2004, by some estimates, also suggesting
the risk that supply is beginning to outpace demand.
"We are concerned that this build-up in inventories in
sectors such as steel is not going to be translated into
end-user demand," Short said.
Sharp gains in producer prices in recent months may also be
losing their oomph, pointing to weaker profit growth ahead for
the industrial sector.
"The rally in China’s producer prices is reaching the
limit...As prices start to ease, buyers will likely halt new
orders and hence overall business momentum will slow," analysts
at ANZ said in a note.
Indeed, China's iron ore futures prices fell nearly 2
percent on Friday and looked set for a monthly drop of 13
percent on worries about surging stockpiles.
Trump fears
Asian financial markets were largely unfazed by the buoyant
China data as investors' attention turned to the first meeting
between Trump and Chinese President Xi Jinping next week.
Trump foreshadowed the risk that those talks could be tense,
tweeting on Thursday that the United States could no longer
tolerate massive trade deficits and job losses.
The US Commerce Department said earlier that Beijing must
change its trade practices and the way its state enterprises
operate.
Trump's recent meeting with German leader Angela Merkel
"revealed he's willing to give bad meetings. A bad meeting with
President Xi would raise the prospect of a trade war, which
would be a global risk-off event," ING's chief Asia economist
Tim Condon said in a note.