China manufacturing activity shrinks as trade war bites

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Chinese manufacturing activity contracted for the third straight month in June, according to official data, highlighting the impact of a trade war with the US despite a fragile truce.

The manufacturing purchasing managers’ index stood at 49.7 in June, data from the National Bureau of Statistics showed on Monday, an improvement on May’s reading of 49.5 but still below the 50-mark that separates expansion from contraction.

China’s manufacturing PMIs — a monthly survey that provides an early glimpse of economic activity — turned negative in April as an escalating trade war with the US drove tariffs to levels as high as 145 per cent.

A truce signed last week between Washington and Beijing reduced those levies, but the world’s second-largest economy is still facing an uncertain trade outlook as it battles a property slowdown at home.

“Policymakers [are likely to wait] and monitor the development of [the] trade war,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management, pointing to improvements in exports. “Deflationary pressure is persistent and the labour market is under stress,” he added.

Exports to the US in May fell by the most since the start of the coronavirus pandemic, but China’s overall exports, a critical growth driver given weakness in the property sector, continued to rise.

A 90-day pause on US tariffs on dozens of other countries will expire on Wednesday next week.

The figure for new export orders was 47.7 in June, still in contraction territory but an improvement on April, when they fell to the lowest level since late 2022.

Retail sales in China unexpectedly jumped in May, according to NBS data released this month, but concerns over consumer demand continue to drive expectations of stimulus. Authorities have cut rates repeatedly and sought to boost confidence in a housing sector, where prices are still falling years into a slowdown.

The non-manufacturing PMI was 50.5 in June, up from 50.3 a month earlier. The overall level was boosted by a rise in the construction PMI, which hit 52.8.

“Fiscal support looks to have continued to support infrastructure spending, while the downturn in property construction seems to have eased last month,” said Zichun Huang, China economist at Capital Economics.