China's Economy Shows Signs of Recovery as PMI Rebounds: Can the Momentum Last?

China’s economy showed signs of stabilization in February, with both the official manufacturing and non-manufacturing purchasing managers’ indices (PMI) returning to expansion territory. The official manufacturing PMI rose to 50.2, its highest level since November, while the non-manufacturing PMI climbed to 50.4. The private-sector Caixin manufacturing PMI also posted a stronger-than-expected rebound, rising to 50.8. While these figures suggest improving momentum, questions remain over whether the recovery can be sustained amid intensifying trade tensions with the U.S. and lingering domestic weaknesses.

Signs of a Turnaround?

The February PMI data offers some optimism that China’s economy may be regaining its footing after a sluggish start to the year. A key driver of the improvement was a significant recovery in new orders, which jumped to 51.1 from 49.2 in January, while production also saw a notable increase to 52.5 from 49.8. These gains mark the highest readings for both sub-indices in nearly a year, indicating that domestic demand is picking up.

However, the export component of the PMI tells a more complicated story. New export orders remained in contraction territory at 48.6, though this was an improvement from January’s 46.4 reading. Despite ongoing trade frictions, external demand showed resilience, potentially due to front-loading by U.S. importers ahead of anticipated tariff hikes. While this provided a short-term boost, the sustainability of export demand remains uncertain, particularly given the additional 10 percent U.S. tariffs set to take effect on March 4.

The non-manufacturing sector also provided mixed signals. While the headline non-manufacturing PMI increased slightly, several sub-indices, including new orders and new export orders, remained in contraction. This suggests that while domestic services activity is holding up, it is not experiencing a robust rebound. Additionally, employment in the manufacturing sector remains weak, with job levels hitting a near five-year low. This points to continued cost-cutting by manufacturers amid margin pressures and sluggish consumer demand.

Key Drivers Behind the PMI Rebound

Several factors contributed to the improvement in PMI readings:

1. Seasonal Factors – February’s data likely benefited from a post-Lunar New Year boost as factories resumed operations and production ramped up. The timing of the holiday often leads to distortions in PMI readings, and economists will be closely watching March data for a clearer picture.

2. Policy Support – A series of stimulus measures rolled out in late 2023, including tax incentives, infrastructure spending, and targeted monetary easing, appear to be having a stabilizing effect. The government has pledged to increase fiscal support further, particularly for small and medium-sized enterprises, which continue to struggle.

3. Stronger Industrial Production – Manufacturing output has been buoyed by rising investment in high-tech industries and renewable energy. However, traditional sectors such as real estate and construction remain a drag on overall economic growth.

4. Global Trade Dynamics – The uptick in new export orders may have been driven by firms rushing to ship goods before the next round of U.S. tariffs takes effect. This front-loading could be masking underlying softness in global demand for Chinese goods.

Expectations from China’s Parliamentary Meeting

China’s annual parliamentary meeting, which begins on March 5, will be a critical event for policymakers to outline their economic agenda for 2025. Key topics expected to be addressed include:

- Growth Targets – The government is widely expected to maintain its GDP growth target at around 5 percent, similar to last year’s goal. This reflects Beijing’s commitment to steady economic expansion, despite structural headwinds.

- Fiscal and Monetary Policy – Policymakers are likely to announce further fiscal stimulus measures, including increased infrastructure spending and tax cuts. The government may also signal additional monetary easing to support credit growth.

- Real Estate and Local Government Debt – With China’s property sector still under pressure and local governments grappling with high debt levels, investors will be watching closely for policy announcements aimed at stabilizing these areas.

- Trade and Industrial Policy – Amid rising tensions with the U.S., China may unveil measures to bolster domestic industries and reduce reliance on foreign technology. Additionally, the government’s stance on potential trade negotiations with Washington will be a focal point.

The Road Ahead: Can the Momentum Hold?

While February’s PMI data points to improving conditions, significant challenges remain. Domestic demand, while stabilizing, is not experiencing a broad-based recovery, and consumer confidence remains weak. Additionally, external pressures from U.S. tariffs and slowing global trade could weigh on China’s industrial sector in the coming months.

The upcoming parliamentary meeting will be closely watched for signals on how Beijing plans to navigate these challenges. If policymakers deliver stronger-than-expected stimulus measures, it could provide further support for economic momentum. However, without meaningful improvements in consumer spending and employment, the risk of a slowdown later in the year remains high.

In summary, China’s economy appears to be on firmer footing than it was at the start of 2024, but uncertainties persist. February’s PMI rebound is a positive sign, yet sustainability will depend on continued policy support, resilient domestic demand, and the ability to manage escalating trade tensions with the U.S. The coming weeks will be crucial in determining whether this nascent recovery can gain traction or if further turbulence lies ahead.