The chill of China's manufacturing industry is back! The PMI in May hit a nearly two-year low, and economic pressures continue to rise.

China's manufacturing activity unexpectedly experienced a sharp decline in May. According to the latest S&P Global Manufacturing Purchasing Managers' Index (PMI) report, the data fell to 48.3, marking the largest drop since September 2022 and breaking a streak of several months of expansion. This highlights the pressures facing the Chinese economy due to weak exports and insufficient domestic demand. Market expectations for further policy stimulus have also increased.

PMI falls significantly below expectations, manufacturing returns to contraction territory.

Caixin/S&P Global PMI recorded 48.3 in May, far below the Reuters estimate of 50.6, and has fallen below the 50 mark for the first time since September 2023, indicating an overall contraction in manufacturing activity. This survey focuses on the mid-month survey, covering more than 500 export-oriented companies, reflecting the accelerated decline in export orders.

Official PMI slightly rises, but still not out of contraction.

At the same time, China's official manufacturing PMI reported 49.5 in May, a slight increase from April's 49, but still in the contraction zone, marking the second consecutive month of shrinkage. However, this data is more in sync with industrial output performance, with the sample covering about 3,000 enterprises, indicating a slight official optimism regarding the manufacturing outlook, although substantial improvements remain to be observed.

The service sector remains stable, and the non-manufacturing PMI is still above the boom-bust line.

According to LSEG data, China's official non-manufacturing PMI for May recorded 50.3, close to April's 50.4, indicating that while the service and construction sectors have slowed down, they are still in a state of moderate expansion. The market is currently awaiting the Caixin services PMI to be released later this week to further assess the overall economic direction.

The trade tensions between China and the United States remain unresolved, and tariff adjustments bring uncertainty.

Although US President Donald Trump announced after high-level trade talks between China and the United States last month that he would suspend 145% tariffs on China for 90 days, most tariffs have been in effect since April. According to the Peterson Institute for International Economics, the current tariffs on goods between China and the United States are 51.1% and 32.6%, respectively, which are still at a high level and pose a challenge to export enterprises.

Industrial output and export performance have diverged, with corporate profits improving.

In April, China's industrial output increased by 6.1% year-on-year, lower than March's 7.7%; however, export performance was relatively strong, with a year-on-year increase of 8.1%, surpassing market expectations. Although exports to the U.S. declined, exports to Southeast Asian countries increased, providing some support. Profits of industrial enterprises also rose for the second consecutive month, indicating that existing policies have been effective in alleviating corporate financial pressures.

Frequent policy stimuli, central bank cuts interest rates and reserve requirements to boost liquidity.

To cope with economic pressures, the People's Bank of China lowered the main interest rates by 10 basis points again in May, and reduced the reserve requirement ratio (RRR) by 50 basis points, releasing liquidity and boosting market confidence. The government also launched multiple measures simultaneously to stimulate domestic demand, stabilize employment, and assist businesses affected by tariff impacts.

Weak domestic demand continues to exert pressure, with real estate and consumption remaining the main drag.

Although the government continues to increase policy support, domestic demand is still weak. April retail sales increased by only 5.1% year-on-year, less than expected; Wholesale prices of industrial goods fell the most in six consecutive months, and consumer prices fell for the third consecutive month. Real estate-related investment fell by 10.3% year-on-year (January-April), reflecting that the weak housing market remains one of the main obstacles to economic recovery.

The road to economic recovery is still long, and the market is looking forward to more actions.

Under the triple pressure of weak external demand, insufficient domestic demand, and deflationary pressures, the Chinese economy shows signs of unstable recovery. The market generally believes that if there is no significant improvement in economic data for the second quarter, Beijing authorities may need to further expand fiscal spending, increase infrastructure investment, or consider more aggressive stimulus measures such as tax cuts and fee reductions.

This article reflects the chill in China's manufacturing industry again! The May PMI hits a nearly two-year low, and economic pressures continue to rise, first appearing in Chain News ABMedia.