Quick overview

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China’s factory activity improved in March and returned to expansion territory, even as the escalation of the war in the Middle East increased pressure on production costs and energy prices.

According to official data cited by Bloomberg L.P., the manufacturing Purchasing Managers’ Index (PMI) rose to 50.4 in March, up from 49 in February. The reading also came slightly above market expectations of 50.1. A figure above 50 indicates expansion in activity.

The improvement follows a start to the year in which the industrial sector had begun to regain momentum, supported by government stimulus and still-solid demand in some segments. However, the new international environment has once again put pressure on factories, particularly due to rising costs for key raw materials and logistical disruptions stemming from the conflict.

The cost of war reaches factories

Chinese manufacturers faced their largest increase in input and production costs since 2022 during March. The rise was largely driven by the surge in crude oil prices, which ended several months of declining costs in that category.

Higher prices for industrial metals such as copper and aluminum also added pressure to the sector’s cost structure.

In many cases, companies were forced to absorb part of these increases rather than fully pass them on to customers, further compressing profit margins. A statistician at the National Bureau of Statistics of China told Bloomberg that the combined pressure from higher commodity prices and rising logistics costs explained much of the deterioration seen in March.

Despite these challenges, industrial activity managed to remain resilient. Part of that resilience was also reflected in shipping data, as China’s port cargo volumes continued to show strength during the first weeks of March — a sign that external disruptions have not yet significantly slowed export flows.

The official data were released one day ahead of a private manufacturing survey, which typically focuses more on small and medium-sized export-oriented companies. That report is closely watched because it complements the official PMI reading and helps determine whether the improvement reflects a broader recovery or isolated pockets of growth within the economy.

Trade tensions remain a risk

At the same time, trade relations with the United States continue to weigh on the outlook. Although some tensions have eased in recent hours, the relationship between Washington and China remains marked by tariff uncertainty and the risk of renewed friction at a particularly sensitive moment for the Chinese economy.

Economists at Bloomberg Economics said the manufacturing sector is still showing signs of resilience but noted that the overall outlook remains constrained by the persistence of the war and the weakness still affecting other parts of the economy.

They warned that a worsening global environment could increase the need for additional policy support in the coming months.

In a separate assessment, Raymond Yeung said the industrial sector had performed relatively well, highlighting the recovery in the production subindex. Still, he added that China’s economic outlook will depend largely on how long the war lasts and how strongly it affects global growth and inflation.