China’s manufacturing sector is facing significant contraction, marked by its steepest decline since 2022 as revealed by the latest data from a private survey. The Caixin/S&P Global manufacturing purchasing managers’ index (PMI) registered a sharp drop to 48.3 in May, falling below the critical threshold of 50 that delineates growth from contraction. This figures starkly contrasts with various analysts’ expectations, including Reuters, which had predicted a reading of 50.6. The decline from April’s 50.4 demonstrates the intensified challenges the sector confronts amidst a turbulent economic landscape characterized by external pressures and internal weaknesses.
The recent PMI results follow an official report released on Saturday, indicating that the manufacturing activity contracted for the second consecutive month, albeit with a slight improvement, moving to 49.5 from April’s 49. This suggests a possible stabilization within the sector, although the overarching narrative remains one of declining foreign demand, particularly in the wake of high U.S. tariffs impacting exports. According to Caixin, the gauge for new export orders fell to its lowest level since July 2023, highlighting the ongoing struggle for Chinese manufacturers to maintain competitiveness in the global market.
The survey further points to a contraction in total new orders for the first time in eight months, a stark indicator of overall demand conditions. Compounding these challenges, the survey revealed persistent weakness in the job market, with employment sinking for the second straight month at the most rapid pace since January. The accumulation of finished goods inventory, noticed for the first time in four months, signals that factories are grappling with declining sales and delays in shipping, ultimately leading to an undesirable buildup of stock.
Wang Zhe, a senior economist at the Caixin Insight Group, noted the increased uncertainty in the trade environment is exacerbating domestic economic issues. Major macroeconomic indicators have shown considerable weakening early in the second quarter, suggesting a reluctance among consumers and businesses to invest amid fluctuating economic conditions.
In addition to the struggles highlighted by the private survey, the official non-manufacturing PMI also fell slightly to 50.3 in May, down from 50.4 in April, though it remains above the pivotal 50 mark, showing continued resilience in sectors beyond manufacturing. As the services and construction sectors have held steady, the divergence in strength highlights the uneven recovery across industries.
Recent trade negotiations have had noticeable impacts on tariffs applied to Chinese imports, reducing U.S. tariffs from their peak of 145% to 51.1% due to ongoing discussions between trade representatives from both nations. However, China’s levies on U.S. goods also remain notable at 32.6%. While these changes may provide temporary relief, the broader effects of the trade environment on Chinese manufacturing cannot be ignored.
In terms of industrial output, China showed a slower growth rate of 6.1% year-on-year in April, a decrease from March’s 7.7% rise. Despite the challenges posed by tariffs, exports surprisingly rose by 8.1% in April, driven by increased shipment activities directed toward Southeast Asian markets—helping to offset sharp declines in exports to the United States.
Industrial profits have also registered improvements over the same period, rising for a second consecutive month in April. These gains can be attributed to existing support measures from the Chinese government aimed at alleviating liquidity issues and improving cash flow for industrial firms despite the broader deflationary pressures affecting the economy.
In response to mounting economic pressures, Chinese policymakers have implemented numerous initiatives designed to stimulate consumption, support businesses facing the brunt of tariffs, and enhance employment opportunities. Among these measures, the People’s Bank of China recently reduced key policy rates and the reserve requirement ratio, resulting in increased liquidity within the economy. Such moves are increasingly crucial as the nation navigates the complexities of persistent deflation, stemming from an extended downturn in the property sector and growing job insecurity.
The continuing slump in the real estate market presents a dual challenge for policymakers. According to Ting Lu, chief economist at Nomura, the implications of both a sluggish property market and an ongoing trade conflict with the United States necessitate “bolder moves” from Beijing to rectify these growing economic issues and boost consumption.
Retail sales figures released for April fell short of expectations, showing only a 5.1% year-on-year increase, while wholesale prices recorded their largest drop in six months, remaining in negative territory for more than two years. The effects of declining consumer prices persisted, marking three consecutive months of deflation.
Investment in property also witnessed a significant downturn, with a 10.3% year-on-year decline reported during the January to April period. This ongoing contraction in the property sector not only poses additional risks to the broader economy but threatens to undermine consumer confidence, complicating Beijing’s path toward sustainable recovery.
Overall, while some indicators suggest minor improvements or stability in select areas of the economy, the overarching trend remains one of contraction, uncertainty, and increased challenges for exporters and manufacturers alike. With external pressures from tariffs and domestic economic challenges, China’s economic landscape is poised for critical scrutiny in the coming months as policymakers seek effective strategies to navigate this multifaceted crisis.