China economic recovery to gradually gain momentum in months ahead on back of pro-growth policies, says Scotiabank

China’s economic recovery is expected to gradually gain momentum in the months ahead on the back of pro-growth policies, although the nation’s factory activity contracted to a three-year low in February.

China’s official manufacturing PMI fell to 49.2 in February from 49.5 a month earlier, largely due to the Chinese New Year-related seasonality in our view. We believe the gauge will rebound in March.

In addition, a rise in the new orders sub-index and a fall in the new export orders sub-index indicate that China’s stimulus policies rolled-out earlier have boosted domestic demand, in line with rallying large-sized enterprise manufacturing PMI.

The Second Session of the 13th National People’s Congress (NPC) will kick off on Tuesday morning and end next week Friday (5-15 March), with further economic stimulus measures set to be delivered.

China is planning to cut the value-added tax rate that covers the manufacturing sector by 3 percentage points as part of measures to support the slowing economy, according to Bloomberg.

On the final day of the annual meeting, the congress is scheduled to vote on a new Foreign Investment Law that seeks to increase intellectual property protection and limit technology transfer.

The law set to be passed will meet some of the main demands of US President Donald Trump to end the trade war between the world's two largest economies. Meanwhile, we also see continued equity inflows, the report added.

Foreign investors have purchased a net USD 9.43bn and USD 9.47bn of mainland China stocks respectively via Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect schemes in the period of 1 January to 4 March.

"We maintain our short USD/CNH positon targeting 6.60 amid continued equity inflows, while keeping a close eye on the USChina trade talks and US stock markets. A substantial pullback in the S&P500 share index that is fluctuating at the critical 2,800 level would dent global market sentiment," Scotiabank commented.