China factory activity returns to growth despite Iran war disruption

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BEIJING – China’s factory activity expanded for the first time in 2026 in March despite higher energy prices and disruptions caused by the escalating conflict in the Middle East.

The official manufacturing purchasing managers’ index (PMI) reached 50.4, versus 49 in February, the National Bureau of Statistics of China said on March 31. The median estimate of economists surveyed by Bloomberg was 50.1, a touch above the threshold separating growth from contraction.

It is the first official data capturing the upheaval sparked by the war, which began when the US and Israel struck Iran on Feb 28.

The non-manufacturing measure of activity in construction and services unexpectedly grew in March, rising to 50.1 from 49.5, the statistics office said.

China’s manufacturing is exiting a two-month contraction after the government ramped up spending at the start of 2026 and as exports prove immune to pressure from abroad, thanks to global demand linked to artificial intelligence. Even so, the fallout from the hostilities has already shown signs of spreading across the world economy, with multiple PMIs compiled by S&P Global for March registering declines.

China remains vulnerable to spillovers from foreign shocks in case of a slowdown in global growth, as the Iran war sends global energy prices soaring. Many Chinese factories that rely on crude or oil-derived products as raw materials are already struggling with higher costs.

China’s official PMIs come a day before the release of a private survey of manufacturing, which tends to be more sensitive to trade activity by focusing on small and export-oriented firms. 

Beijing’s huge strategic oil reserves and its push into renewable energy are so far helping cushion the toll of the war on the broader economy.

But other risks abound. The US and China have started trade investigations against each other ahead of US President Donald Trump’s planned state visit to Beijing in mid-May. 

The world’s two biggest economies have largely stabilised their ties after a trade tit-for-tat in 2025, although China has signalled its opposition to fresh US actions that aim to revive Mr Trump’s tariff agenda after the Supreme Court struck down some of his levies.

Beijing lowered its annual economic growth target to 4.5 per cent to 5 per cent – the least ambitious goal since 1991. While China’s factories saw exports surge in the first two months of 2026 following a record trade surplus in 2025, the outlook now hinges in part on the duration and intensity of the Iran war, which threatens global growth and inflation. BLOOMBERG