China Factories Jolted by Oil Prices But Activity Resumes Growth

Shehzad Qazi, COO & Managing Director at China Beige Book International, discusses how the war in Iran is weighing on China's economy.

China’s factories saw a huge run-up in input costs even as their activity expanded for the first time this year, in one of the first tangible signs of spillover from the conflict in the Middle East that’s threatening profits.

Despite higher energy prices and other disruptions caused by the war, the official manufacturing purchasing managers’ index exceeded forecasts and reached 50.4 in March, rising above the threshold separating growth from contraction.

Chinese companies recorded their fastest surge in raw material costs and output prices in about four years, data published by the National Bureau of Statistics showed on Tuesday, as crude rallied during a conflict that’s disrupting swaths of global energy supply. But the pace of price hikes by factories is so far lagging behind the increase in their costs, indicating that manufacturers are opting to foot part of the bill from the shock.

“We’re starting to see the impact of higher energy prices, which could drag on activity if prices stay higher for longer,” said Lynn Song, chief economist for Greater China at ING Bank. “Persistently higher prices could begin to weigh more substantively on activity in the coming months.”

The upward pressure on costs in China is adding to signs of the spreading economic fallout from the war, which began when the US and Israel struck Iran on Feb. 28.

China’s factory activity slowed in March for export-oriented firms as their costs surged, according to a private survey, contrasting with an official gauge that showed manufacturing improving despite the Iran war.

The RatingDog China manufacturing purchasing managers index fell to 50.8 last month from a multi-year peak of 52.1 in February, according to a statement released on Wednesday, remaining above the threshold that indicates growth. That compares with the median forecast of 51.5 in a Bloomberg survey of economists.

“Cost pressures intensified significantly,” Yao Yu, founder of RatingDog, said in the statement. “Supply chains faced notable disruptions.” At the same time, manufacturing expanded across much of Asia in March. Following February’s record-high reading of 53.8, the S&P Global ASEAN Manufacturing PMI fell to 51.8 last month — the lowest since last September — highlighting a notable loss of growth momentum.

Official figures released by China on Tuesday showed factory activity expanded for the first time this year despite higher energy prices and disruptions caused by the escalating conflict in the Middle East. The private poll tends to reflect activity in smaller and more export-oriented firms.  The RatingDog survey results have generally been stronger than those from the official poll over the previous year as exports powered China’s economy.

While China’s factories saw overseas shipments surge in the first two months of this year, the outlook now hinges in part on the duration and intensity of the Iran war.

Trade volumes have held up well so far, with the flow of containers through Chinese ports in March exceeding last year’s record levels, despite slowing in weekly terms at the end of the month.

Price pressures are intensifying, however, with the near-total closure of the Strait of Hormuz choking off energy supplies as the war grinds on.

The rate of input price inflation picked up last month to the fastest since March 2022, according to RatingDog, with output costs increasing at their sharpest pace in four years. Suppliers’ delivery times lengthened to the largest extent since December 2022. RatingDog’s survey also found that new orders and output expanded at slower rates, even as employment rose for a third straight month — its longest period of job creation since mid-2021.

“The macro environment presents a more complex picture for the manufacturing sector,” Yao said. “Internationally, ongoing geopolitical conflicts continue to keep oil prices elevated and exacerbate volatility and cost pressures in key raw material markets.

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