PMI remains in contraction as Beijing seeks to revive demand
China’s manufacturing sector shrank for a third consecutive month in June, despite modest improvements in some indicators and ongoing government stimulus. The official manufacturing purchasing managers’ index (PMI) rose slightly to 49.7 from 49.5 in May, staying below the critical 50 threshold that marks the line between expansion and contraction, according to the National Bureau of Statistics.
Production activity edged higher with a sub-index reading of 51, while new orders climbed to 50.2. However, factory employment and inventories remained weak, with both indexes falling below 48. These mixed results highlight ongoing headwinds facing manufacturers, including deflationary pressures, export challenges, and excess supply.
The non-manufacturing PMI, which includes services and construction, improved slightly to 50.5 from 50.3. While services weakened marginally, the construction sub-index surged to 52.8, driven by infrastructure activity. The CSI 300 Index rose 0.22% after the data release.
Exports and deflationary pressures cloud outlook
New export orders recovered to 47.5 from 44.7 in May, possibly reflecting the impact of a recent U.S.-China trade truce. However, shipments to the U.S. remain sharply down, falling 34.5% year-over-year in May. Chinese firms continue to navigate high U.S. tariffs, weak global demand, and intensifying domestic price competition.
Producer prices posted their steepest drop since July 2023, contributing to persistent deflation that has weighed heavily on industrial profits. May saw a 9.1% decline in profits for Chinese industrial firms, marking the steepest fall in seven months. Consumer prices also dropped 0.1% in May, further underscoring weak demand.
Beijing looks to consumption to drive recovery
Premier Li Qiang reiterated China’s goal of transforming into a “consumption powerhouse,” pledging to increase domestic demand through stimulus. Analysts say more action is needed. Tommy Xie of OCBC Bank emphasized the need for expanded debt issuance and targeted consumer incentives such as vouchers and trade-in programs.
Meanwhile, progress in trade talks with the U.S. was noted, as both sides confirmed steps to implement their May agreement. However, limited details raised concerns about how China will evaluate export applications for rare earth materials. Beijing warned it would respond forcefully to any U.S. deals that undermine Chinese interests.
Market participants await the Caixin/S&P Global private PMI reading due Tuesday, with forecasts predicting a modest rise to 49 for June, from 48.3 previously. Continued contraction would further reinforce concerns about China’s growth momentum in the second half of 2025.
