China’s factory activity picks up slightly, but Asia broadly weak

Monday, 8 April 2019 00:00 - - {{hitsCtrl.values.hits}}

HONG KONG (Reuters): Factory activity in China showed a slight, surprising recovery last month, in a sign that stimulus injected into Asia’s growth engine may be yielding results, but worries of a global slowdown persisted due to weakness elsewhere in the region.

Even in China, growth in new domestic and export orders was marginal. Factory activity in Japan, South Korea, Malaysia, and Taiwan shrank further, adding to expectations of a dovish turn from central bankers in the region.

The US-China tariff war and slowing Chinese demand after a campaign to reduce financial risk-taking have caused broad damage, hurting everyone from small firms in the supply chains of Chinese manufacturers to global tech behemoths such as Apple and across the map from Australia to South Korea and Japan.

Later on Monday, euro zone activity surveys were expected to show contraction due to its own trade frictions with the United States, Brexit uncertainty, and fallout from the US-China trade dispute.

The weak external environment is feeding back into the US economy, prompting the Federal Reserve to abruptly end its policy tightening last month and causing the Treasury yield curve to briefly invert last year – a potential signal of a looming recession.

Fed’s pause has changed the game for many Asian central banks and investors are betting on a growing list of potential rate cutters.

“The PMI data ... is telling us that the stimulus measures that have been put in place by the Chinese authorities since the middle of last year are finally starting to have an impact,” said Khoon Goh, head of Asia research at ANZ.

“Now, of course, this is just one month. I’m expecting Asian central bankers to continue to be accommodative and some of them to cut interest rates. There’s no doubt that overall growth still slowed.”

China’s Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) expanded at the strongest pace in eight months in March, rising to 50.8 from 49.9 in February, above the 50-mark dividing expansion from contraction and the highest level since July 2018.

An official survey on Sunday also showed modest expansion.

Economists also cautioned there were seasonal factors in play, with activity in March traditionally picking up markedly whenever the Chinese Lunar New Year holidays fell in February, as they did this year.

If the trend is sustained, it could mark the turnaround that China’s policymakers had hoped for after some heavy fiscal and monetary stimulus, including five cuts in bank reserve requirements in the past year, although analysts say more such measures may still be in the pipeline.

BofA Merrill Lynch analysts took note of the “green shoots” from the March PMI readings, but said real activity growth could have stayed under pressure in the first quarter, especially given the tougher environment for exports.

“We believe policymakers will stick to their commitment on policy easing to stabilise growth,” the BofA Merrill Lynch analysts said in a note to clients. Chinese Premier Li Keqiang said last month the government has additional monetary policy measures that it can take, and will even cut “its own flesh” to help finance large-scale tax cuts.