China’s manufacturing activity unexpectedly contracted in May, sending a warning signal about the country’s economy. The ongoing real estate crisis continues to weigh down on the confidence of businesses, consumers, and investors. Analysts believe that the trade tensions between Beijing and Western countries will cast a deeper shadow over the economy.
According to the China’s National Bureau of Statistics on Friday (May 31), the official Purchasing Managers’ Index (PMI) for the manufacturing sector dropped to 49.5 in May. This not only fell below the 50 mark that separates expansion from contraction but also was lower than April’s 50.4 and the analysts’ predicted 50.5.
This data indicates that after experiencing growth for just two months, China’s manufacturing industry has reversed course once again, potentially impacting the Communist regime’s target of about 5% economic growth this year.
Economist Xu Tianchen told Reuters, “I think these data particularly reflect weak domestic demand, ongoing deterioration in the real estate industry, and lackluster retail sales.”
Some believe that the May data could be a temporary phenomenon, with June’s data still to be observed as China pumps in 300 billion yuan to rescue the housing market and issues special government bonds.
However, Chinese manufacturing still faces more pressures. Currently, trade tensions between Beijing and the United States and the European Union are escalating, as they are China’s two largest export markets. Manufacturers will encounter more obstacles due to these tensions.
The U.S. and EU argue that the Chinese government’s national subsidies have led to overcapacity in many industries. They have set up new trade barriers, which will hinder the sales of key products such as electric vehicles.
Based on the May data, China’s PMI for new orders (49.6) and new export orders (48.3) both fell into contraction territory.
Furthermore, the employment index was only 48.1, indicating a continued contraction in labor conditions in the manufacturing sector. The main raw material procurement price index has risen to its highest level in eight months, reflecting increasing production costs.
Raymond Yeung, the Chief Economist for Greater China at ANZ, told Bloomberg, “The manufacturing-driven economic recovery remains fragile, and in the coming months, the rise of trade protectionism will be a major obstacle.”
Recently, the Biden administration has increased import tariffs on Chinese electric vehicles, steel and aluminum, semiconductors, critical minerals, solar panels, gantry cranes, and medical equipment.
In the coming weeks, the EU is also expected to announce higher tariffs on Chinese electric vehicles while investigating Beijing’s subsidies in other areas.
The commercial activity index for the construction industry in May was 54.4, a decline of 1.9 from the previous month, indicating a slowdown in construction activity following a rebound in the previous month.
The challenges in the real estate industry have had a widespread negative impact on the Chinese economy. The growth rate of retail sales last month was the slowest since December 2022, while new home prices saw the sharpest decline in nine years. These signs indicate that it is still uncertain whether the Chinese economy has turned a corner.