1. Impact of new US tariffs already being felt?
Last month, the US proposed import-tariffs increases on Chinese goods, including semiconductors, electric vehicles, steel and batteries.
Within the official manufacturing PMI, the new export order subindex fell to 47.2 in May from 50.6 in April.
“[The reading] was disappointing after the recent strength of industrial activity data. The PMI came in notably weaker than both the market and our forecasts, which expected an uptick,” said Lynn Song, chief economist for Greater China at ING.
“Given a fairly strong positive correlation between the data, the disappointing PMI release sends a warning signal for the upcoming industrial production data.”
The survey showed output rose at the fastest pace since June 2022, with firms in the consumer segment reporting sharp growth in May.
The Caixin survey is believed to be skewed more towards smaller, export-oriented firms than the much broader official PMI.
2. Services ‘hold steady’
China’s official non-manufacturing PMI – a measurement of sentiment in the service and construction sectors – fell to 51.1 in May from 51.2 in April but remained in expansion territory for the fifth straight month.
Analysts at Capital Economics said the gauge “held steady in May”, but that this was offset by a sizeable fall in the official construction PMI from 56.3 to 54.4.
This reflected waning impact from the recent boost to infrastructure spending from fiscal stimulus, they added.
Most of the important subcategories stayed in contraction, added Song at ING, with new orders remaining below 50 for the 13th consecutive month.
“Expansion in supply and demand picked up pace. Business activity and total new orders both grew for the 17th month in a row, increasing at the fastest pace since July and May last year, respectively,” said Wang Zhe, senior economist at the Caixin Insight Group.
3. Contrasting composites
China’s official composite PMI, which tracks both the services and manufacturing sectors, declined from 51.7 in April to a three-month low of 51 in May.
Analysts at Capital Economics said that the recovery would regain some momentum in the short term, largely on the back of a fresh wave of fiscal support, but that this would unlikely prevent a renewed slowdown farther ahead.
The Caixin/S&P’s composite PMI, meanwhile, rose to 54.1 last month from 52.8 in April, the highest in a year.
“Growth in supply and demand in the manufacturing and services sectors picked up pace, with a particularly strong increase in services demand. Exports in both sectors improved amid market optimism. Employment in the services industry shifted from a decline to an increase, driving the index at the composite level into expansion for the first time in nine months,” said Wang at Caixin Insight.
4. Time for consumption, investment policies?
Song at ING said that it is usually advisable not to overly rely on survey data, as it can be fickle, but warned that the disappointing PMI data “may send a warning sign for growth”.
“This is especially the case as industrial activity has been the primary source of strength in the first four months of the year amid weaker-than-expected retail sales,” he added.
Wang at Caixin Insight, though, said that China’s economy was generally stable and remained on the road to recovery, pointing to the expectation-beating growth in industrial production in April.
“The economy’s performance is consistent with the Caixin manufacturing PMI, which has remained in expansionary territory for seven consecutive months. Nevertheless, pressure on employment and weaker demand than supply remain prominent issues,” Wang added.