Survey: Factory activity shrinks

China's factory activity contracted in May for the first time in eight months, a private survey showed, pointing to pressures from the United States' volatile tariff policy and shoring up the case for strong macro policy support to boost demand.

The Caixin China General Manufacturing Purchasing Managers' Index, an indicator of the operating conditions of the sector, dipped to 48.3 in May from 50.4 in April, below the 50-point mark that separates expansion from contraction, media group Caixin said in a report. The figure also hit its lowest level since September 2022.

Compared to the official gauge, the Caixin manufacturing PMI tracks small, export-oriented companies more closely.

Wang Zhe, a senior economist at Caixin Insight Group, linked the contraction in the manufacturing sector to the decline in both supply and demand, saying unfavorable factors affecting China's economic development remain relatively prevalent. "Uncertainty in the external trade environment has increased, adding to domestic economic headwinds."

The Caixin report showed manufacturing output recorded its first contraction in 19 months in May, falling at the fastest pace since November 2022. Meanwhile, the gauge for new orders hit contraction for the first time in eight months, recording the lowest level since September 2022.

However, business optimism improved from April's low, as surveyed manufacturers generally believed that the China-US trade conflict would abate in the near term, expecting to see improvements in the external market. The indicator for future output expectations remained in expansionary territory in May, with the reading rebounding by nearly 3 percentage points, up from the third-lowest level on record seen in April.

"Major macroeconomic indicators showed a marked weakening at the start of the second quarter," Wang said. "The downward pressure on the economy has significantly intensified compared to preceding periods."

He noted that the lasting impact of earlier measures aimed at stimulating consumption needs further evaluation, saying follow-up actions should be introduced based on actual conditions.

"More importantly, boosting domestic demand should be grounded in improving household incomes," he added.

Data released by the National Bureau of Statistics on Saturday offered the latest official snapshot of the pressures facing the economy, as the official PMI for China's manufacturing sector came in at 49.5 in May, up from 49 in April, but remained in the contraction zone for a second consecutive month.

Lu Ting, chief China economist at Nomura, said the improvement in the official manufacturing PMI was led by the increase in new export orders, thanks to the US-China tariff de-escalation.

However, he noted that the fact that the manufacturing PMI failed to rise into expansionary territory shows that the impact from the tariff truce should not be overstated.