Economy gets uplifting news from indexes

Analysts: Strong reading suggests that economy is stabilizing and improving

China's services sector activity expanded for a third straight month in March, pointing to further recovery in business activity amid the optimized COVID-19 containment measures, a private survey showed on Thursday.

Analysts said the strong reading suggests that China's economy is stabilizing and improving, marking a good start for a robust 2023. Meanwhile, they warned that the economic recovery is not yet solid, saying more efforts should be made to boost domestic demand and step up macroeconomic policy support.

The Caixin China General Services Purchasing Managers' Index, which focuses more on small and medium-sized enterprises and exporters, rose to 57.8 in March from 55 in February, media group Caixin said in a report on Thursday.

The reading was well above the 50-point mark that separates growth from contraction, marking a new high not seen since November 2020.

"Services supply and demand expanded rapidly last month. The market returned to normal quickly after the most recent wave of COVID-19 infections subsided, fueling both supply and demand," said Wang Zhe, senior economist at Caixin Insight Group.

The gauges for business activity and total new business both continued to pick up in March, staying within expansionary territory and reaching their highest level since November 2020. Meanwhile, the easing of international travel restrictions boosted services exports in March, as the subindex for new export orders logged the highest reading since records began in September 2014.

According to the report, business confidence across China's services sector remained strong in March, despite the degree of optimism slipping to a three-month low.

Services firms expect that market conditions and customer demand will revive further in the coming months against the backdrop of the optimization of COVID-19 control measures. They were generally optimistic that business activity will continue to rise over the coming year.

Owing to the improvement in the services sector, Caixin's composite PMI — which includes both manufacturing and services activity — rose to 54.5 from 54.2 in February, the report said.

Wang said the manufacturing and services sectors diverged in March, with an accelerated rise in services activity and a softer upturn in manufacturing output, reflecting that the foundation for economic recovery is not yet solid.

"Looking forward, economic growth will still rely on a boost in domestic demand, especially an improvement in household consumption. Only by working hard to stabilize employment, increase household income and improve market expectations can the government reach its goal of restoring and expanding consumption," Wang added.

The Caixin readings were in line with an official survey released last week by the National Bureau of Statistics, which showed the official PMI for China's manufacturing sector remained strong in March, despite moderating to 51.9 from 52.6 in February.

The nonmanufacturing PMI rose further from 56.3 in February to 58.2 in March, its strongest since May 2011. Of the nonmanufacturing PMIs, the services and construction indexes rose to 56.9 and 65.6 in March from 55.6 and 60.2 in February, according to the NBS.

Lu Ting, chief China economist at Nomura, said these strong readings suggest China's economy has reached a sweet spot with the government's solid measures to stabilize the property sector and optimize COVID-19 control measures.

"However, amid rapidly worsening geopolitical tensions and financial concerns outside of China, this may not last long," he said. "Despite the surge of the construction PMI index, property markets have yet to truly recover, in our view, especially outside of top-tier cities, and the private sector's confidence has yet to fully return."

Looking ahead, Lu said the real test will be activity data in the second and third quarters after the release of pent-up demand fades.

Given China's continued recovery trend and the optimization of COVID-19 control measures, Li Chao, chief economist at Zheshang Securities, estimates that China's economy will expand by 4.9 percent year-on-year in the first quarter, with an improvement in both supply and demand.

Li said China's industrial output and retail sales are expected to increase by 5 percent and 7.7 percent, respectively, in March. And manufacturing investment and infrastructure investment will likely rise by 8.5 percent and 7.9 percent, respectively, in the first quarter.