China’s manufacturing contracts for third straight month despite trade truce and stimulus push

China’s manufacturing activity shrank for the third straight month in June, even as official data showed slight improvement from the previous month, highlighting the continued strain on the world’s second-largest economy amid fragile demand, persistent deflation, and the lingering effects of a trade war with the United States. The official manufacturing Purchasing Managers’ Index (PMI), released by the National Bureau of Statistics (NBS) on June 30, edged up to 49.7 in June from 49.5 in May. While this month’s reading exceeds that of May, it remained below the 50-point threshold that separates expansion from contraction.

The sub-index for production improved to 51, signalling a modest pickup in factory output, and new orders rose to 50.2, indicating slight growth in domestic demand. However, employment and inventory levels continued to fall, both remaining firmly in contraction territory at 47.9 and 48, respectively.

Trade ceasefire offers temporary relief

The marginal rebound comes on the heels of a tentative trade truce reached between Beijing and Washington in May, following months of rising tariffs that hit Chinese exporters hard. Shipments to the US plunged 34.5 per cent year-on-year in May and over 21 per cent in April before the agreement eased some pressure. New export orders rose to 47.5 in June from 44.7 in May, suggesting that US demand may be gradually recovering. Still, the export index remains well below the neutral 50 mark, underscoring the fragility of external demand.

A separate deal announced on June 27 between the US and China to advance details of their framework agreement was welcomed by markets, though economists warned the lack of specificity raises questions about implementation, especially in sensitive sectors like rare earth exports.

Meanwhile, Premier Li Qiang reiterated last week that Beijing is pushing forward with a long-term transition from a manufacturing-led to a consumption-driven economy. But analysts say the transformation will take years and could dampen growth in the short term.

Non-manufacturing sectors provide some lift

China’s non-manufacturing PMI, which includes services and construction, rose to 50.5 in June from 50.3 in May, supported by a surge in construction activity (52.8) as infrastructure investment continued. Services, however, showed signs of stagnation, with that sub-index slipping to 50.1.

Despite the modest uptick in activity, China’s economy continues to battle deflationary pressures. Consumer prices fell 0.1 per cent in May, while producer prices saw their sharpest decline since July 2023. Industrial profits plummeted 9.1 per cent year-on-year in May, the biggest drop in seven months.

Economists are now calling for more targeted fiscal stimulus, including consumer vouchers and expanded trade-in schemes for appliances and automobiles, to support domestic demand.

A private-sector survey by Caixin and S&P Global, set to be released July 1, is expected to show a slight improvement in sentiment among smaller manufacturers, though still in contraction at 49.0.