China’s Factory Activity Stalls in May as Export Orders Fall and Hormuz Drives Up Costs
China’s manufacturing sector came to a near standstill in May, with the official purchasing managers’ index dropping to its lowest level in three months as new export orders contracted and surging energy costs squeezed factory profits. The official manufacturing PMI dropped to 50 from 50.3 in April, straddling the 50-mark separating growth from contraction, according to a survey by the National Bureau of Statistics released on Sunday. The reading matched the forecast in a Reuters poll of economists but extended a run of deteriorating external demand that is adding pressure on Beijing to find new drivers of growth. NBC News
Supply improved while demand weakened, with the sub-indexes for production and new orders coming in at 51.2 and 49.9 respectively in the manufacturing PMI survey. The new orders sub-index slipping below 50 indicates that domestic demand for manufactured goods contracted outright during the month. Investing.com
Export orders deteriorated faster. New export orders fell more sharply, dropping to 48.6 from 50.3 in April, heaping pressure on policymakers to reduce the economy’s reliance on overseas demand and strengthen domestic consumption. Investing.com
“The slowdown in foreign demand was particularly prominent, mainly due to a marked contraction in the exports from the consumer goods manufacturing sector,” said Wen Tao, an analyst at the China Logistics Information Center. Investing.com
Rising input costs compounded the demand shortfall. The gauge for raw material prices in the manufacturing PMI survey came in at 60.5, down from 63.7 in April but still well above the 50-point mark, suggesting input costs continued to rise, albeit at a slower pace. “The purchase price index remained in expansionary territory, showing that raw material prices continued to rise, which also kept prices at the product end increasing,” Wen said. NBC NewsNBC News
The Strait of Hormuz crisis is a key driver of those cost pressures. The US-Israeli war with Iran, which started in late February and led to the effective closure of the Strait of Hormuz, has sent energy prices surging, threatening to squeeze manufacturers’ profits as costs soar. Activity in high-energy-consuming industries contracted in May, according to NBS data, a direct consequence of elevated fuel and raw material costs flowing from the disruption to Gulf energy routes. NBC NewsNBC News
Not all sectors weakened. High-tech and equipment manufacturing outperformed the overall sector in May, logging PMI readings of 52.9 and 52.1 respectively, NBS data showed. The divergence between energy-intensive and technology-driven manufacturing is widening as Beijing’s industrial policy pushes investment toward semiconductors, electric vehicles and advanced equipment. NBC News
Trade negotiations with Washington have offered little relief so far. A summit between Chinese and US leaders in Beijing in mid-May did not result in an extension of the trade truce the two governments reached late last year, although the two sides agreed to explore areas for tariff cuts on goods worth some $30 billion from each. That partial opening has not yet translated into a reversal in the export order decline recorded in May. NBC News
Services offered a partial counterweight. The non-manufacturing PMI, which includes services and construction, rose to 50.1 from 49.4 in April, helped by a surge in travel spending during the five-day May Day holiday at the start of the month. The services activity gauge improved to 50.3, its highest in nine months, suggesting Beijing’s push to expand the services sector may be gaining some traction. Investing.com
Weakness in the property market, employment and consumer spending continues to dampen growth, leaving China reliant on global demand to absorb goods produced by its manufacturing sector. The property sector, which accounts for a significant share of household wealth and construction activity, has not recovered meaningfully despite successive rounds of government support since 2023. Investing.com
Regional and Global Impact
China is the world’s largest exporter of manufactured goods, and a sustained contraction in its export order book carries direct consequences for trading partners across Asia, Europe and the Americas. A further weakening in Chinese factory output would reduce demand for raw materials from commodity-exporting economies including Australia, Brazil and several African nations. For global supply chains still adjusting to the Hormuz closure, a simultaneous slowdown in Chinese manufacturing output compounds the pressure on companies seeking alternative sourcing and routing strategies. China’s government has vowed to address the supply-demand mismatch and has set a less ambitious GDP growth target for 2026, allowing more room for reforms — an implicit acknowledgement from Beijing that the economy faces structural headwinds that short-term stimulus cannot fully address. Investing.com
Background
Data released earlier in May showed China’s growth momentum cooled in April despite a rebound in exports. The NBS composite PMI, which combines manufacturing and services, had recovered to 50.5 in March after falling to a three-year low in February, when factory activity slowed sharply during the Lunar New Year holiday period. The Hormuz closure since late February has added a persistent external cost shock on top of the pre-existing domestic weaknesses in property and household consumption. China has historically managed export downturns through currency management, export tax rebates and targeted credit to manufacturers, though the current combination of domestic demand weakness and external supply disruption limits the effectiveness of those tools. NBC News
What Happens Next
The Caixin manufacturing PMI, a separate private survey covering smaller and medium-sized enterprises, is due for release in the coming days and will provide a secondary read on factory conditions in May. Beijing has not yet announced additional fiscal or monetary stimulus measures in response to the May data. China’s government has vowed to address the supply-demand mismatch, but has set no specific timeline for the reform measures needed to reduce the economy’s dependence on export-driven manufacturing. The trajectory of Hormuz ceasefire talks between the United States and Iran will determine how quickly energy-related cost pressures ease for Chinese manufacturers. A further deterioration in export orders in June would increase the likelihood of targeted policy intervention before the end of the third quarter. NBC News
