China’s factory activity rebounds, but war-driven risks cloud outlook

China’s manufacturing sector returned to growth in March, ending a two-month contraction, according to official data released Tuesday. The Manufacturing Purchasing Managers’ Index (PMI) rose to 50.4 from 49 in February , crossing the 50-mark that signals expansion; while a 1.4-point increase may appear modest, it is notable as it pushes the index back into expansion territory and marks its strongest level in a year .

The rebound was driven largely by resilient export demand , particularly from Southeast Asia and Europe , which has helped offset weak domestic conditions. China’s economy continues to face pressure from a prolonged property sector slump not just due to over-construction, but also high developer debt, tightening regulations on borrowing, declining homebuyer confidence, and slowing population growth factors that have collectively weighed on consumption and investment. As a result, exports have remained a key growth engine, pushing the country’s trade surplus to a record high last year.

However, economists warn that the full impact of the Iran war , which began on February 28, has yet to be reflected in the data. While supply chains have so far remained stable, rising global energy costs pose a significant risk. Disruptions in the Strait of Hormuz , a critical route for about 20% of the world’s oil supply , could increase production and transportation costs.

Analysts estimate that if disruptions persist for months, China could face losses worth tens of billions of dollars , driven by higher input costs, shortages of key materials such as chemical products and rare gases , and slower industrial output.

China’s export outlook may also weaken if the conflict slows global growth and fuels inflation, reducing demand for goods. With exports to the United States already declining, attention is on potential improvements in trade ties with key partners, including India, where discussions have focused on easing border tensions and boosting economic cooperation, as well as the European Union, where talks have centred on trade imbalances and market access. Engagement with Southeast Asian nations under frameworks like ASEAN also remains a priority to sustain export momentum.

Despite the current rebound, economists caution that prolonged geopolitical tensions could undermine China’s fragile recovery in the months ahead.