China’s manufacturing sector—long considered one of the primary engines of global growth—continues to show signs of persistent weakness as mid-2025 approaches. Despite aggressive stimulus efforts and repeated government interventions to boost domestic demand, the official Purchasing Managers’ Index (PMI) for Chinese manufacturing has remained below the critical 50 threshold for a third straight month in June, posting a reading of 49.7. This ongoing contraction reflects deep-seated structural and cyclical challenges facing the world’s second-largest economy, including deflationary pressures, trade tensions with the U.S., and ongoing softness in both domestic and global demand.

Quantitative Review: PMI, Employment, and Inventory Trends

The official June PMI, while up slightly from May’s 49.5, still lingers below the expansion line at 49.7—exactly matching market expectations. Notably, the production sub-index improved to 51, and the new orders sub-index ticked up to 50.2, both signaling modest rebounds in factory output and demand. However, other key indicators remain weak: inventory levels declined to 48, while factory employment fell further to 47.9, confirming that manufacturers are still scaling back production and trimming their workforces amid persistent uncertainty.

The non-manufacturing PMI, which captures both services and construction, climbed modestly to 50.5 in June from 50.3 in May. Service sector activity slipped to 50.1, while construction accelerated to 52.8, a sign that government-led infrastructure projects continue to offer some support to overall economic activity.

Deflation and Producer Prices: A Dual Challenge

One of the most striking challenges in the Chinese economy is ongoing deflation—evident in both consumer and producer price indices. The latest data shows consumer prices down 0.1% year-over-year in May, while the producer price index (PPI) registered its steepest decline since July 2023. This persistent drop in prices is eroding corporate margins, dampening business confidence, and limiting manufacturers’ willingness to invest.

Industrial profits in China plunged 9.1% in May, the sharpest year-on-year drop in seven months, underscoring the ongoing pressures on the manufacturing sector. Industry insiders point to persistent overcapacity, a fierce price war among manufacturers, and uncertainty over the durability of government stimulus programs as key obstacles to recovery.

The Impact of the Trade War, Exports, and Fiscal Stimulus

Beyond deflation, the protracted trade dispute between China and the United States continues to weigh on the export sector. Chinese exports to the U.S. tumbled 34.5% in May compared to a year earlier, after a 21% annual drop in April. The imposition of aggressive U.S. tariffs earlier in the year forced Chinese exporters to scramble for alternative markets and, in some cases, resulted in triple-digit tariff rates—briefly in effect before being rolled back in mid-May as part of a trade truce.

On the domestic front, Beijing has ramped up efforts to boost consumer demand through various stimulus measures: issuing vouchers, promoting consumer trade-in programs, and increasing consumer credit availability. Yet the Chinese economy remains heavily reliant on fiscal stimulus, and the People’s Bank of China has had to tread carefully, balancing support for growth with the need to manage financial risks, especially those related to local government debt and property bubbles.

Mild Improvement Amid Uncertainty: Market Reactions and Outlook

While the headline manufacturing PMI remains in contraction, some indicators suggest a tentative rebound. The new export orders sub-index rose sharply to 47.5 in June from 44.7 in May, which analysts attribute to a slight recovery in U.S. demand following the mid-May trade truce. China’s CSI 300 stock index rose 0.22% after the data release, signaling cautious optimism among equity investors.

However, economists warn that the second half of 2025 could bring renewed headwinds. Export growth remains fragile, fiscal tailwinds are fading, and global demand is still subdued. Without a significant acceleration in external or domestic demand, China’s manufacturing sector may struggle to regain its pre-pandemic momentum. The prospect of slower growth, combined with persistent deflation and weak consumer confidence, means that further government stimulus may be required to stabilize the economy.

Policy Response: Boosting Demand and Safeguarding Stability

In recent remarks at a key economic forum in Tianjin, Chinese Premier Li Qiang underscored the government’s commitment to turning China into a “consumption powerhouse.” Authorities are expected to continue issuing consumer vouchers, expand trade-in programs for durable goods, and provide additional credit and fiscal support to households and local governments. Nevertheless, Beijing faces a delicate balancing act: maintaining enough stimulus to drive recovery while avoiding financial instability and excessive leverage.

Negotiations between Beijing and Washington are progressing cautiously, with both sides working to implement the terms of the recent trade truce. However, details remain scarce, especially around sensitive issues like the export of rare earth magnets and the criteria for lifting specific U.S. restrictions. Chinese officials have reiterated their refusal to accept any trade deals that compromise their strategic interests and have promised “resolute countermeasures” if such situations arise.

Data Versus Sentiment: Recovery or False Dawn?

Despite marginal improvements in headline manufacturing indices, persistent deflation, falling factory profits, and ongoing export weakness point to a still-fragile recovery. While equity markets have responded positively to recent data, most economists remain cautious. Without a sustained rebound in consumer and export demand—and continued robust fiscal support—China’s industrial sector is likely to remain under pressure.

The upcoming private Caixin-S&P Global survey on manufacturing, expected to improve only marginally to 49 in June, will offer further insight into the health of smaller, privately owned manufacturers. If these data remain below the 50 threshold, it will reinforce concerns that China’s manufacturing recovery remains elusive.

Conclusion: China’s Manufacturing Sector at a Crossroads of Deflation, Stimulus, and Global Headwinds

The ongoing contraction in China’s manufacturing activity in 2025 encapsulates many of the global economy’s prevailing risks: deflation, weak global demand, persistent trade tensions, and cautious macroeconomic policymaking. While government-led infrastructure and stimulus have propped up select sectors, manufacturers face declining profitability and a tough battle to revive both domestic and foreign sales.

Will 2025 see a true turnaround in China’s manufacturing fortunes, or are these modest improvements simply a pause before further slowdown? Much will depend on Beijing’s ability to maintain confidence, stimulate consumer demand, and successfully navigate the complexities of the evolving U.S.-China trade relationship.


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