China’s industrial strength drives economic rebound in March

The world's second largest economy has set a modest annual economic growth target for 2021

In 2021, China will target the creation of more than 11 million new urban jobs. Reuters

China’s economic rebound continued in March, as factory activities accelerated amid strong global orders and recovering domestic demand, leading to a surge in producer prices.

That is the outlook of an aggregate index combining eight early indicators tracked by Bloomberg, which remained unchanged from February in strong expansionary territory.

Strong factory activity momentum is also partly reflected by the jump in producer prices, with prices surging 5 per cent in March from a year earlier, the fastest increase since December 2017. This could add further pressure to the global inflation outlook, as demand for China-made goods is set to climb after the US rolled out the latest $1.9 trillion stimulus.

The pace of the housing market’s expansion slowed in March, after months of government effort to crack down on risks in the debt-laden sector. Year-on-year housing sales growth in the four largest cities moderated in March from the previous month.

Activity picked up at China’s small and medium-sized enterprises, especially those in the manufacturing sector, a survey of over 500 SMEs by Standard Chartered showed. Their index measuring SMEs’ confidence climbed to 53.6 in March, the highest level in six months.

“SME activity accelerated as businesses resumed after the Lunar New Year holidays and Covid-19 containment measures were gradually eased,” Shen Lan and Ding Shuang, economists at Standard Chartered, wrote in a report.

Export-oriented businesses continued to outperform their peers focusing on the domestic market, as further improvement in global demand led to a faster increase in new orders, they wrote.

Exports soared 60.6 per cent in the first two months of 2021 from a year earlier. The outsize increase largely reflected a low base, but underlying momentum is strong.

China’s central bank has estimated the maximum the economy can expand without driving inflation, known as the potential growth rate, is under 6 per cent in the next five years.

In a working paper released on Thursday, the statistics department of the People’s Bank of China said potential growth was projected at 5 per cent to 5.7 per cent in the period covering the government’s latest five-year plan through 2025. That represents an overall “medium to high” growth rate, it said.

Potential output measures the maximum sustainable expansion of gross domestic product without causing inflation. The objective of monetary policy should be to match actual output with potential, and the support of monetary policy to the real economy should be in line with the expansion of potential GDP, according to the paper.

China’s official growth target for 2021 is “above 6 per cent”, though economists predict much higher expansion of more than 8 per cent, partly because of last year’s low base during the pandemic.