China Factory Activity Contracts Amid U.S. Tariffs and Export Slump

China’s factory activity contracted in May for the first time in eight months, signaling growing pressure from U.S. tariffs and weakening global demand. The Caixin/S&P Global manufacturing PMI fell to 48.3 from 50.4 in April, missing expectations and marking the lowest level in 32 months. A reading below 50 indicates contraction.

The data aligns with China’s official PMI released days earlier, showing a second consecutive month of factory decline. The downturn comes as a U.S. federal appeals court reinstated broad tariffs just after a trade court temporarily blocked them, reigniting trade tensions between the world’s two largest economies. U.S. Treasury Secretary Scott Bessent acknowledged that trade negotiations with China had "stalled."

Export orders fell for the second month, shrinking at the fastest pace since July 2023, while total new orders slumped to levels not seen since September 2022. The decline was attributed to dampened demand due to rising U.S. tariffs and global economic uncertainty.

Factory output also contracted for the first time since October 2023, and manufacturing employment saw its sharpest drop this year as companies reduced staff to cut costs. Output prices fell for a sixth straight month, squeezed by intense competition—particularly in China’s auto sector, where an ongoing price war has sparked concerns of a market shakeout.

Despite weak near-term performance, export prices rose for the first time in nine months, driven by higher logistics and tariff costs. Business confidence improved slightly, with companies optimistic about future trade conditions and market expansion.

Morgan Stanley’s Chief China Economist Robin Xing said the figures highlight persistent supply-demand imbalances and deflation risks. He noted that while there's talk of rebalancing China’s growth model, structural change remains limited, making a sustained recovery elusive.