BEIJING, Mar 31 (Reuters): Factory activity in China unexpectedly grew for the first time in four months in March, an official survey showed on Sunday, suggesting government stimulus measures may be starting to take hold in the world's second largest economy.
If sustained, the improvement in business conditions could indicate that manufacturing is on a path to recovery, easing fears that China could slip into a sharper economic downturn.
But analysts remained cautious, citing seasonal distortions due to the long lunar New Year break in February. They said real investment and consumer demand remained soft and pushed up inventories, potentially adding pressure to the sector.
The official Purchasing Managers' Index (PMI) rose to 50.5 in March from February's three-year low of 49.2, marking the first expansion in four months, according to data released by the National Bureau of Statistics (NBS) on Sunday. The 50-mark separates growth from contraction on a monthly basis.
Analysts surveyed by Reuters had forecast the manufacturing gauge would pick up slightly to 49.5, as factories ramped up production after the Lunar New Year holidays and rebuilt inventories ahead of a seasonal pickup in activity in spring.
Factory output grew at its fastest pace in six months in March, reversing a brief contraction in the previous month. It rose to 52.7 from February's 49.5, the highest level seen since September 2018.
Total new orders also grew at a quicker pace, driving up factory-gate prices to a five-month high of 51.4, ending four months of contraction.
"The jump will likely give a big boost to stock markets and could delay a cut in the reserve requirement ratio (RRR)," said Ting Lu, chief China economist at Nomura.
China has announced five RRR cuts in the past year to free up more cash for banks to boost lending to private firms, and further cuts are widely expected.
Ting said there is limited room for manufacturing PMI to rise further and the chance for another dip is "not small".
"Overall, although the manufacturing PMI in March can somewhat alleviate the pessimistic expectations of the economy, we believe that the actual situation may not be so optimistic as reflected in this indicator," Lianxun Securities said in a note.
Export orders shrank for the 10th straight month, suggesting external demand remained sluggish and further policy cushion may be needed if trade tensions escalate. China's trade-oriented neighbors Japan, South Korea and Taiwan have seen more signs of slackening demand, both in China and elsewhere.
"Construction work starting at the beginning of the year has led to strong domestic demand, but external demand is still weak, and the outlook on imports and exports is still not optimistic," economists at Huatai Securities said.
Tit-for-tat tariffs imposed by Washington and Beijing remain in place as talks continue to end a trade war that has disrupted the flow of billions of dollars of goods between the world's two largest economies.
US President Donald Trump said on Friday that talks with China were going very well, but added he would not accept anything less than a "great deal" after top trade officials wrapped up two days of discussions in Beijing.
Factories shed more staff in March, with the employment sub-index still hovering below the no-change mark of 50. It edged up marginally to 47.6 from 47.5 in February.
An AFP report adds: Chinese banks have posted profits for 2018 but warned that domestic and global uncertainties could put downward pressure on the sector in the coming year.
Bank of China (BOC) posted a profit of 192.44 billion yuan ($28.67 billion), up four per cent from the previous year, which the company credited to a stable economy and "prudent monetary policy" from the Chinese government.
But the sector "will face a complicated operating environment in 2019", BOC said in its annual report filed to the Hong Kong Stock Exchange late Friday.
"The growth drivers of the global economy will weaken, international financial markets will remain at risk of fluctuation, and the functioning of the economy will be subject to a number of uncertainties."
The Industrial & Commercial Bank of China (ICBC) - the country's largest bank - posted a net profit of 297.68 billion yuan in 2018, a 4.1 per cent increase.
China's second largest lender by assets, China Construction Bank, posted a net profit of 254.66 billion yuan for 2018, a gain of 5.11 per cent.
The company credited the "steady growth" to, among other factors, the central bank's reserve requirement cut, in a filing on Thursday.
Beijing has been locked in a bruising trade war with Washington for most of 2018, rocking global markets.
Trade negotiators are seeking to iron out major differences over US accusations that China has been using unfair trade practices for years by heavily subsidising its companies while snatching the technological know-how of American firms.
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