- China’s factory activity contracts in May, but there are signs of improvement.
- China’s exports likely slowed in May amid trade uncertainty.
- As trade talks continue, China thinks it has leverage over the U.S.
China’s manufacturing sector took a hit for the second month in a row in May, as revealed by official data released on Saturday (May 31). This has sparked hopes for more economic stimulus, especially as ongoing trade tensions with the United States continue to put a damper on growth, reports Business Times.
PMI Stays Below Growth Mark
The official Purchasing Managers’ Index (PMI) saw a slight uptick to 49.5 in May, up from 49.0 in April, which was in line with Reuters’ median forecast. However, it still sits below the crucial 50-point mark that indicates expansion, highlighting the persistent struggles within the manufacturing industry.
Trade Tensions Heat Up Amid Tariff Changes
US President Donald Trump has ramped up the trade dispute by accusing China of violating a bilateral agreement regarding tariff reductions. On Friday, he announced a significant increase in global tariffs on steel and aluminium, raising them to 50 per cent, which has further complicated the global trade landscape.
“Recent developments between China and the United States suggest bilateral relations are not improving,” said Zhiwei Zhang, Chief Economist, Pinpoint Asset Management “Firms in China and the United States with exposure to international trade have to run their business under persistently high uncertainty. It will weigh on the growth outlook in both countries.”
Some Signs of Rebound in US Trade
Despite ongoing tensions, some companies reported improved trade activity with the US. The new orders sub-index rose to 49.8 in May from 49.2 in April, while the new export orders sub-index increased to 47.5 from 44.7. “Some firms reported a noticeable rebound in trade with the United States, with improvements in both imports and exports,” said Zhao Qinghe, Senior NBS Statistician
The Services Sector Remains Steady
The non-manufacturing PMI, which includes services and construction, saw a slight dip to 50.3 from 50.4. However, it’s still above the crucial 50-mark, suggesting that these sectors are experiencing modest growth.
Anticipated Stimulus Measures
Analysts are predicting that Beijing will introduce more monetary and fiscal support in the upcoming months to help stabilise the economy amid ongoing external challenges. This month, the central bank has already implemented interest rate cuts and injected a significant amount of liquidity into the market.
Concerns Over the 90-Day Tariff Pause
While China and the US have agreed to a 90-day pause on tariff increases, which initially sparked optimism for reduced tensions, analysts are still wary due to the slow pace of negotiations and the broader global economic risks.
Moody’s Maintains a Negative Outlook on China
The rating agency Moody’s has kept its negative outlook on China, cautioning that ongoing trade tensions could have a detrimental impact on the country’s credit profile. “Unease over tensions with major trade partners could have a lasting impact on its credit profile.” However, the agency acknowledged policy improvements addressing earlier concerns over state-owned enterprises and local government debt.
Growth Target in Focus as Tariffs Threaten Momentum
China’s economy has outperformed expectations in the first quarter and is aiming for around 5% growth this year. However, analysts caution that the ongoing US tariffs could disrupt this momentum, particularly as domestic demand remains sluggish and deflationary pressures continue to loom.
In April, exports exceeded forecasts, fueled by robust demand from international manufacturers eager to meet orders before the 90-day tariff window closes.
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Source: Business Times
