China's March PMI Reaches 50.4 Amid Middle East Conflict Pressures

Stronger Demand Drives China’s Manufacturing PMI to 50.4

China’s factory activity experienced its highest growth in a year during March, buoyed by stronger demand, as revealed by an official survey on Tuesday. This development provides some relief to an economy facing challenges from global supply chain issues and fluctuations in energy markets. While the improved figures alleviate some pressure on policymakers, concerns remain about us their sustainability due to rising energy costs linked to the conflict in the Middle East and new risks to growth that could hinder manufacturers who depend on exports and operate with narrow profit margins

Export Momentum and Surging Input Costs

According to data from the National Bureau of Statistics (NBS), the official manufacturing purchasing managers’ index (PMI) increased to 50.4 in March from 49.0 in February, surpassing the 50-mark and reaching its highest level in a year, which was better than the analysts’ projected 50.1 in a Reuters poll. The manufacturing PMI had been in contraction for most of 2025 and the initial months of 2026. China’s exports of goods continued to drive growth in January and February, following last year’s record trade surplus of $1.2 trillion, sustained by strong global demand for electronics, especially semiconductors. The commerce ministry indicated last week that this positive trend could continue despite ongoing geopolitical tensions.

However, increasing concerns about the Middle East conflict are troubling policymakers. Signs of stress were visible in the latest survey, as the sub-index for the purchase prices of key raw materials surged to 63.9 in March from 54.8 in February, propelled by rising commodity prices and quicker procurement by companies, according to the NBS. Output prices also increased but at a slower rate, indicating limited pricing power for businesses.

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Economic Outlook, Rate Expectations, and Geopolitical Headwinds

Rising input costs may also pressure wages and job security, which could further exacerbate the already weak domestic demand. China’s economic performance exceeded expectations in the first two months, partly due to government support. According to the NBS survey, the non-manufacturing PMI, which encompasses services and construction, rose to 50.1 from February’s 49.5.

The PMI survey from Tuesday indicates that China’s GDP growth in the first quarter is likely to surpass 4.5%, which is the minimum of Beijing’s 4.5%-5.0% target for this year, according to analysts at ANZ. ANZ now predicts that rate cuts will not occur in 2026 or 2027, as growth remains within the official target, and suggests that policymakers will likely focus on structural measures to mitigate the effects of the oil crisis. China’s leadership has consistently pledged to pivot the growth engine towards domestic consumption to lessen dependence on external demand. However, achieving these rebalancing reforms will require time, and as the effects of the conflict worsen, businesses may experience intensified challenges in the short term.

Dan Wang, director for China at Eurasia Group, commented that in times of global uncertainty, the dependence on China’s industrial supply chain increases, similar to the scenario at the onset of the pandemic. Nevertheless, he cautioned that exports and PMI could face challenges in the latter half of the year, as issues in Iran might trigger a recession in significant economies, particularly the EU, which is crucial for China’s trad.

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