China’s factory activity expanded in March following two months of contraction, the government data showed on Tuesday, but analysts suggest that a prolonged impact of the Iran war could weigh on growth.
The official manufacturing purchasing managers index (PMI) rose to 50.4 from 49 in February, the National Bureau of Statistics reported, beating economists’ expectations and notching the strongest reading in a year. PMI is measured on a scale of 0 to 100, and a reading above 50 indicates expansion.
While the latest official data covered a period after the Iran war began on Feb. 28, analysts say the impacts of surging energy costs have not yet been fully seen. "So far, supply disruptions have not occurred in a material way,” said Jacqueline Rong, a chief China economist at BNP Paribas.
A years-long property sector slump in China has also weighed on economic growth and weakened domestic consumption and investment demand in China, the world’s second-largest economy after the U.S.
To help drive its economy, China has been reliant on growing exports, especially to regions such as Southeast Asia and Europe, which propelled its trade surplus last year to a record $1.2 trillion despite higher U.S. tariffs.
China’s export engine could hit headwinds as the Iran war drives up energy costs and disrupts supply chains, with most maritime traffic blocked from passing the Strait of Hormuz, through which roughly a fifth of the world’s oil normally passes.
The extent of the impact will depend on how long the energy flows from the Middle East are cut off, said BNP Paribas’ Rong. "If it is months, rather than weeks, then the supply disruptions, not just from oil, but also from the shortage of many chemical products – such as rare gases – would manifest itself in disrupting industrial production and services,” she said.
China’s exports could also suffer if overall global growth takes a serious hit from the energy crisis, Rong said. Analysts say, for example, that higher global inflation could weaken consumption demand for Chinese goods.
Chinese leaders in early March unveiled an economic growth target of 4.5% to 5% for this year, a slightly lower goal than the "around 5%” last year and the lowest growth target since 1991.
For now, China’s economy "appears to have weathered" the energy shock from the Iran war well, wrote Zichun Huang, China economist at Capital Economics, in a recent research note, although she also cautioned it is "likely that the fallout from the Iran war will grow over the coming months."
With China's exports to the U.S., its largest trading partner, in decline over the past months, economists are closely watching for positive signs in trade relations between Washington and Beijing as U.S. President Donald Trump is expected to meet with Chinese leader Xi Jinping in May.
Some analysts say lower U.S. tariffs following a recent Supreme Court ruling against Trump’s wide-reaching global tariffs could give China a small boost to exports and factory activity.
