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Ignore Bounce in China PMIs: Country Still Faces Weak Export Orders, Rising Stockpiles, Soft Prices

Manufacturing and services data from China released last week showed a surprise rebound from their record low bases in February, but traders should note that the readings do not signal a stabilization in economic activity.

Despite the bounce, we’re likely to continue to see further periods of struggle for China’s factories and businesses and the broader economy due to the rapid spread of the coronavirus across the global economy, the unprecedented lockdowns in several countries and the almost near certainty of a global recession.

Official China Manufacturing and Non-Manufacturing PMI

Factory activity in China unexpectedly expanded in March from a collapse the month before, but analysts caution that a durable near-term recovery is far from assured as the global coronavirus crisis knocks foreign demand and threatens a steep economic slump, Reuters reported.

China’s official Purchasing Managers’ Index (PMI) rose to 52 in March from a plunge to a record low of 35.7 in February, the National Bureau of Statistics (NBS) said on March 30, above the 50-point mark that separates monthly growth from contraction. Analysts polled by Reuters had expected the March PMI to come in at 45.0.

The service sector, which accounts for 60% of China’s GDP, also saw an expansion in activity, with the official non-manufacturing PMI rising to 52.3 from 29.6 in February, a separate NBS survey showed.

Results of a private survey released on April 1 showed China’s manufacturing activity expanded slightly in March as factories began to come online amid a coronavirus outbreak.

Unofficial Caixin China Manufacturing and Non-Manufacturing PMI

The Caixin/Markit manufacturing Purchasing Manager’s Index for March was 50.1. Analysts polled by Reuters had expected the Caixin/Markit PMI to come in at 45.5, compared with February’s sharpest contraction on record at 40.3.

China’s services sector struggled to get back on its feet in March after a brutal month of unprecedented shop closures and public lockdowns amid the coronavirus outbreak, a private survey showed on Friday.

Services companies cut jobs at the fastest pace on record as orders plunged for the second straight month and businesses scrambled to reduce their operating costs. Export orders also slumped again as more countries imposed their own tough virus containment measures.

While the Caixin/Markit services Purchasing Managers’ Index (PMI) rebounded to 43 in March from a record low of 26.5 in February, it still remained deep in contraction territory and was the second weakest reading since the survey began in late 2005.

Too Early to Represent a Change in Trend

The rebound in the manufacturing and services sectors simply indicates that economic activity improved modestly relative to February’s dismal showing, but remains well-below pre-virus levels.

With the rest of the world now suffering, China is likely to experience weak export orders, rising stockpiles and soft prices especially from its main customers – Japan, South Korea and the United States.

Furthermore, the main issue facing Chinese manufacturers will shift back to a lack of market demand.

This article was originally posted on FX Empire

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