By Yukun Zhang and Ryan Woo
BEIJING, March 31 (Reuters) – China’s factory activity grew at the fastest pace in a year in March, underpinned by improved demand, an official survey showed on Tuesday, a welcome relief for an economy grappling with global supply chain strains and energy market volatility.
The stronger reading eases pressure on policymakers, though its durability is in doubt as surging energy prices driven by the Middle East war, and heightened growth risks, pose fresh headwinds for manufacturers reliant on exports and operating on thin margins.
“The outlook for Q2 is unclear at this stage, given the negative impact from high energy prices,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management.
“The market is increasingly worried about the risk of global growth slowdown and supply chain disruption.”
The official manufacturing purchasing managers’ index (PMI) rose to 50.4 from 49.0 in February, above the 50-threshold and hitting the highest point in 12 months, data released by the National Bureau of Statistics (NBS) showed. It beat analysts’ forecast for a 50.1 reading in a Reuters poll.
The manufacturing PMI was in contraction for most of 2025 and the first two months of 2026.
China’s goods exports continued to power growth in January and February after last year’s record $1.2 trillion trade surplus, buoyed by firm global demand for electronics, particularly semiconductors. The commerce ministry said last week the momentum looked set to hold, even as geopolitical strains linger.
Yet the war in the Middle East is raising concerns for policymakers.
Pressure was already evident in the latest survey. The sub-index for purchase prices of main raw materials jumped to 63.9 in March from 54.8 in February, driven by rising bulk commodity prices and faster procurement by companies, the NBS said.
Output prices also rose, albeit at a more modest pace, suggesting limited pricing power.
WAR FANS BUSINESS UNCERTAINTY AMID WEAK DOMESTIC DEMAND
The March PMI data may have been skewed by the Lunar New Year holiday, despite seasonal adjustments to the NBS survey that economists say remain imperfect. The festival fell in February, when factories often shut for longer than the official break, which stretched to a record nine days this year.
Businesses accelerated their resumption of work and production after the holiday and market activity improved, NBS statistician Huo Lihui said in a statement, adding that PMI readings improved across companies of different sizes.
The sub-indexes for output and new orders both rose above 51 from below 50 the previous month, while that for new export orders improved to 49.1 from 45 in February.
China Association of Automobile Manufacturers, an industry association, said earlier this month that the war could affect car exports. The Middle East accounted for around a fifth of China’s vehicle exports last year.
Hikes in input costs could pressure wages and job security, which would in turn weigh on already chronically weak domestic demand.
China’s economic activity outperformed expectations in the first two months in part due to government support.
The non-manufacturing PMI, which includes services and construction, also increased to 50.1 from 49.5 in February, the NBS survey showed.
Tuesday’s PMI survey suggests China’s first-quarter GDP growth would likely exceed 4.5%, the floor for Beijing’s 4.5%-5.0% target for this year, ANZ analysts said.
ANZ no longer expects rate cuts in 2026 or 2027 given growth stayed within the official goal, saying instead policymakers would likely prioritise structural measures to cushion the impact of the oil shock.
China’s leaders have repeatedly vowed to shift the growth engine toward domestic consumption to reduce reliance on external demand. But rebalancing reforms will take time, and as the fallout from the war deepens, businesses are likely to feel the pain more sharply in the near term.
“When the global situation is uncertain, reliance on China’s industrial chain increases, similar to the situation at the beginning of the pandemic,” said Dan Wang, director for China at Eurasia Group.
“However, exports and PMI may face risks in the second half of the year, as the Iranian issue could lead to a recession in major economies, especially the EU, which is China’s most important trading destination.”
(Reporting by Yukun Zhang and Ryan Woo; Editing by Shri Navaratnam)
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