China’s May factory slowdown likely to deepens as trade tensions with US and EU escalate

China’s manufacturing sector is poised to contract for the second month in a row in May, signalling fresh strain on the country’s export-heavy economy as it faces simultaneous trade flare-ups with the United States and the European Union, highlights a Reuters poll.

According to a Reuters poll of 21 economists, the official Purchasing Managers’ Index (PMI), scheduled for release on Saturday (June 1), is expected to register at 49.5, slightly higher than April’s 49.0, but still below the 50-point threshold that separates expansion from contraction.

The latest data reflects a broader slowdown across China’s $19 trillion economy, which is contending with weakening domestic demand, deflation, and a growing property crisis, even as policymakers race to stabilise growth through stimulus.

China is now fighting a trade war on two fronts

The May factory slump comes at a time when China is navigating major trade tensions with both Washington and Brussels.

In the US, President Donald Trump has escalated economic hostilities by slapping 145 per cent tariffs on a wide range of Chinese imports — part of his broader push to decouple from China.

Although a temporary 90-day tariff truce was reached, with duties lowered to 30 per cent, negotiations remain deadlocked and the core issues unresolved.

Simultaneously, the European Union has reportedly launched anti-dumping investigations targeting Chinese tyres and electric vehicles.

China has reportedly retaliated with probes into European brandy and dairy products, fuelling fears of a full-fledged trade confrontation with the bloc, as per Reuters.

This dual-front pressure is reportedly placing immense strain on China’s industrial backbone, which has traditionally relied on open global markets to power growth.

Domestic challenges are compounding the crisis

According to Reuters, China’s internal economic environment offers little relief. Despite a stronger-than-expected GDP performance in Q1 2025, deflation remains entrenched.

The country’s producer price index dropped 2.7 per cent year-on-year in April, extending its contraction for a third consecutive month.

Reuters poll highlights that real incomes have stagnated, and consumer spending has yet to rebound convincingly after the pandemic. Meanwhile, the long-running property sector slump continues to drag on overall sentiment and private investment.

Even though industrial profits showed some signs of improvement, they remain concentrated among a handful of state-backed firms, leaving smaller manufacturers especially exposed to the current downturn, as per Reuters

Beijing is expected to roll out more stimulus

To counteract the external and internal economic drag, China’s government is reportedly expected to announce further fiscal and monetary stimulus measures. These could reportedly include additional interest rate cuts, tax incentives, infrastructure spending, and targeted credit for small and medium-sized firms.

The PMI numbers to be released on June 1 will be followed by the Caixin private sector PMI on June 3, which focuses more on smaller, export-oriented companies. Analysts predict a modest improvement in the Caixin reading, up to 50.6 from 50.4, suggesting fragile but ongoing momentum.

The road ahead is uncertain

As the world’s second-largest economy contends with deepening trade hostilities and an uneven post-pandemic recovery, the question now is whether Beijing can successfully pivot from an export-driven model to a more resilient, demand-led economy.

The coming weeks, with trade talks in flux, tariff deadlines looming, and critical economic data releases will be crucial in shaping China’s path through a turbulent global landscape.