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    Chinese national flags are flying near a steel factory in Wu'an, Hebei province, China, February 23, 2017

    Mainland China's Manufacturing to Accelerate in March

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    Beijing is expecting a modest pickup in China's factory activity this outgoing month, and is preparing to introduce fiscal accommodation aimed at reducing the nation's reliance on exports, and boosting domestic consumption.

    Kristian Rouz —Chinese factory activity is projected to gain momentum in March after a dramatic slowdown last month. While it continues to expand, albeit at a slower pace, China's manufacturing is facing a decline in exports coupled with gradually increasing domestic demand.

    This comes as the Chinese central government is weighing cutting its value-added tax (VAT) for the manufacturing sector in order to spur the domestic demand for Chinese-manufactured goods.

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    According to preliminary projections, the Purchasing Managers' Index (PMI) for the Chinese manufacturing sector increased to 50.5 points this month, compared to 50.2 in February. Readings above 50 indicate expansion.

    The higher expected manufacturing activity stems from Beijing's decision to remove the air pollution restrictions it imposed for the winter period. Additionally, the Chinese construction sector is bracing for seasonal acceleration in the spring, driving the demand for manufactured goods.

    This would mark the 20th consecutive month of uninterrupted expansion in Mainland China's manufacturing, a good sign for the broader Chinese economy reflecting its underlying strength.

    According to a separate report, the China Beige Book, released this week, this outgoing quarter Chinese companies have increased their output of steel products, driven by solid sales performance, including exports. Consequently, China's lending activity, business investment, and employment have all posted modest increases during the same period.

    However, an increase in business inventories has weighed on steel prices. Additionally, the tariffs on industrial metals, imposed by the US, also marred the outlook for Chinese steel producers.

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    Beijing expects the Chinese economy to expand 6.9 percent year-on-year in the first half of this year, in line with last year's pace of expansion. However, for FY 2018, the Chinese authorities are expecting GDP growth to moderate at 6.5 percent.

    A yet another report showed an even more prominent improvement in Mainland China's economic activity. The Caixin/Markit Manufacturing PMI is forecast to increase to 51.7 from this month, compared to the reading of 51.6 in February.

    The Caixin/Markit PMI focuses on the data from small and medium-sized enterprises (SME), whereas the government-administered PMI primarily reflects activity at the larger state-owned enterprises (SOE).

    A mere comparison of the two reports suggests China's private-sector in growing at a quicker pace, contributing a greater share to the nation's GDP growth and employment.

    The government in Beijing has stated it would encourage the market-driven private sector of the economy, and its latest initiative — tax cuts for the manufacturers — is seen as benefitting mainly the SME segment.

    China's VAT cuts, according to the state media, will reduce the tax burden for Chinese manufacturers by at least $38 bln this year alone. The measure is aimed at improving the sustainability of Chinese industrial production, and providing SME with a competitive edge against the larger state-run conglomerates.

    "The tax cut is a positive move," Goldman Sachs analysts wrote in a note. "However, the magnitude of the cut is relatively small and is already factored into the official fiscal budget."

    The tax cuts are also projected to reduce the structural imbalances within the Chinese economy, and contribute to the global economic expansion, as a robust manufacturing activity in China is driving the global demand for energy and commodity goods.

    The government plans to cut the VAT rate from 17 to 16 percent for manufacturers, and from 11 to 10 percent for a selection of other industries.

    Beijing also said it plans to introduce income tax cuts, and provide fiscal subsidies for electric and hydrogen vehicle purchases. These measures come in the context of broader economic reforms, as the Chinese government seeks to reduce the economy's dependence on exports and support domestic demand, rendering China's GDP growth more resilient.

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