China’s May factory activity unexpectedly shrinks, clocking its worst drop since 2022: Caixin

China’s manufacturing activity in May shrank at its fastest pace since September 2022, a private survey showed Tuesday, highlighting the impact of prohibitive U.S. tariffs as the decline in new export orders quickened.

The Caixin/S&P Global manufacturing purchasing managers’ index came in at 48.3, missing Reuters’ median estimate of 50.6 and dropping sharply from 50.4 in April. It fell below 50, the mark that separates growth from contraction, for the first time since September last year.

The private gauge followed the official PMI released on Saturday that showed China’s manufacturing activity contracted for a second month in May, although ticking slightly higher to 49.5 from 49 in April, reflecting early signs of stabilization in the sector. That reading was in line with Reuters’ expectations.

The decline in foreign demand accelerated in May, with the gauge for new export orders falling to its lowest level since July 2023, Caixin said. Total new orders, an indicator of overall demand, also contracted for the first time in eight months.

The job market remained grim, with employment shrinking for the second straight month and at the fastest clip since January, according to the survey.

Notably, the factories’ finished goods inventory accumulated for the first time in four months due to falling sales and delays in outbound shipments, the survey showed.

“Uncertainty in the external trade environment has increased, adding to domestic economic headwinds,” said Wang Zhe, senior economist at Caixin Insight Group, adding that “major macroeconomic indicators showed a marked weakening at the start of the second quarter.”

The private survey, conducted mid-month, covers a smaller sample of over 500 mostly export-oriented firms, while the official PMI — compiled at month-end — samples 3,000 companies and aligns more closely with industrial output, according to Goldman Sachs.

The official non-manufacturing PMI, which covers services and construction, fell to 50.3 in May from 50.4 in April, staying above the 50-mark since January 2023, according to LSEG data. Caixin services PMI for May is due Thursday.

U.S. President Donald Trump paused 145% tariffs on Chinese imports — most of which took effect in April, for 90 days — following a meeting between the U.S. and Chinese top trade representatives in Switzerland last month.

U.S. tariffs on goods imported from China are now down to 51.1% while China’s levies on U.S. imports stand at 32.6%, according to think-tank Peterson Institute for International Economics.

China’s industrial output, which measures the value of goods produced, grew at a slower pace of 6.1% year on year in April compared with a 7.7% jump in the previous month.

Exports rose a better-than-expected 8.1% in April from a year earlier, as businesses’ increased shipments to Southeast Asian nations made up for the sharp drop in goods sent to the U.S.

The country’s industrial profits rose for a second month in April, despite higher tariffs and entrenched deflationary pressures, as Beijing’s existing support measures helped ease liquidity strains and improve cash flows of industrial firms.

Chinese policymakers have rolled out a plethora of measures aimed at stimulating consumption, supporting tariff-hit businesses and boosting employment. In May, the People’s Bank of China lowered key policy rates by 10 basis points and the reserve requirement ratio, or RRR, by 50 basis points, reducing the amount of cash that banks must hold in reserve, boosting liquidity in the economy.

These steps come against the backdrop of China’s persistent deflationary pressures, as a prolonged housing market downturn and job insecurity hampers investment and consumer spending.

Beijing will have to deal with a “double-whammy” of protracted property market slump and an ongoing trade war, Ting Lu, chief China economist at Nomura said Tuesday, expecting Beijing to take “bolder moves to clean up the mess in the property sector” and boost consumption.

Retail sales missed expectations, rising 5.1% in April from a year earlier. Wholesale prices posted the steepest drop in six months in April, staying in deflationary territory for over two years. Consumer prices also fell for a third month.

The decline in property-related investment deepened, falling 10.3% year on year for the January to April period.