China's March Manufacturing Growth Could 'Dump Into Global Markets, Thus Triggering Deflation,' Expert Warns

Shares of Chinese companies and metal commodities experienced a notable rally on Monday, buoyed by a significant uptick in the country’s manufacturing activity in March.

The Caixin China General Manufacturing PMI climbed to 51.1 in March, marking its fastest growth rate since February 2023 and surpassing market expectations, which were pegged at 51.

Chinese Manufacturing Activity Hits 13-Month High: Key Highlights

The Chinese Manufacturing activity has recorded its fifth straight month of expansion, the fastest in 13 months. The influx of new orders, including those for exports, saw a quicker pace of growth due to improvement in both domestic and international market conditions. Notably, the acceleration in new export orders is the most rapid observed in just over a year.

In terms of inflation, the Chinese manufacturing sector witnessed a drop in input prices for the first time since July—albeit marginally—owing to decreased costs for raw materials. This led companies to reduce their selling prices for the third consecutive month, aiming to spark new demand, with the latest cuts being the deepest observed in eight months.

Optimism within the sector also reached its highest since April 2023, driven by anticipation of increased manufacturing activities and more favorable global economic projections.

Economists React With Cautious Optimism

Veteran investor Ed Yardeni expressed some degree of optimism, suggesting this could invigorate global economic growth and commodity prices. However, he also warned of potential risks, including the possibility of the Chinese government “pushing factories to produce more to dump into global markets, thus triggering deflation, threatening foreign manufacturers, and raising trade tensions.”

Echoing the sentiment of cautious optimism, S&P Global economist Dr. Wang Zhe highlighted that Chinese economic performance in the early months of the year exceeded expectations.

Despite the PMI’s positive trajectory over five months, Zhe highlighted ongoing challenges, including employment concerns, persistent low prices, and insufficient demand. He stressed that “consistent efforts should be made to accelerate growth while improving the quality and efficiency of economic development.”

Market Response

Domestic Chinese equity indices rallied, reflecting investor optimism following the release of encouraging economic data from China. The Shanghai Composite index witnessed a 1.19% increase, closing at 3,077, while the Shenzhen Component saw a more pronounced jump of 2.62%, ending the day at 9,647.

Chinese stocks listed in New York, such as Alibaba Group Holdings Inc. BABA, JD.com Inc. JD, Nio Group Inc. NIO, and Li Auto Inc. LI, saw premarket gains ranging from 1.2% to 3.8%.

Gold prices hit $2,265/oz overnight, extending record highs. Copper prices inched 0.8% higher. The VanEck Gold Miners ETF GDX was 1.8% higher at 08:10 a.m. Monday, on track to notch a fifth straight session of gains.

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Image generated using artificial intelligence with Midjourney.