Factory activity among smaller Chinese manufacturers grew at its fastest pace since 2021 due to strong overseas orders, a private index revealed, despite broader surveys indicating weak domestic demand and trade tensions causing another industrial sector contraction.
The Caixin/S&P Global manufacturing PMI increased to 51.8 in June from 51.7 the previous month, exceeding analysts’ forecasts of 51.2 and marking the highest growth rate since May 2021. This index, focusing on smaller, export-oriented firms, has stayed above the 50-point growth threshold for eight consecutive months.
In contrast, the broader official PMI released on Sunday showed a decline in overall manufacturing activity for the second straight month in June, with the services sector hitting a five-month low. The Caixin survey reported that manufacturing output growth reached a two-year high in June, with the orders index, including overseas orders, remaining in expansionary territory, albeit at a slower pace.
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Demand for consumer and intermediate goods outpaced that for investment goods, according to the survey. Despite exceeding forecasts in May, China’s export sales’ sustainability remains uncertain amid recent trade tensions.
“The PMIs for June were mixed but overall suggest that the economic recovery lost some momentum last month,” wrote Zichun Huang, China Economist at Capital Economics, in a research note. The surveys may have been influenced by negative sentiment from recent tariff announcements by the United States and the European Union. The EU is set to impose preliminary import tariffs on Chinese electric vehicles on July 4.
China’s economy continues to struggle, particularly due to the vast property sector’s failure to respond to a rescue package announced in May. A private survey on Monday showed that new home prices in China rose at their slowest pace in five months in June.
The Caixin survey highlighted rising costs for business owners driven by higher raw material prices, such as steel, copper, and aluminum, and increased freight costs. As a result, the input subindex rose at its fastest pace in two years. “Insufficient market confidence and effective demand remain key challenges,” said Wang Zhe, Senior Economist at Caixin Insight Group.
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Manufacturing producers’ confidence for the next 12 months hit its lowest point since November 2019, due to concerns over rising competition and economic uncertainty. The industry continued to scale back hiring in June.
“We still see the 5% GDP target achievable this year, but it will take time and more policy efforts to heal the wounds and bring back confidence,” Citi economists wrote in a research note. Citi anticipated only incremental measures for the rest of the year, including additional property-supporting efforts, two 10-basis point policy rate cuts, a 50-basis point cut in banks’ reserve ratio requirements, and accelerated fiscal deployment without budget revisions or a bond quota expansion.
