China’s factory activity has sharply contracted at the quickest pace since last September. Today’s new data shows just how stark that reality is. Unsurprisingly, new export orders have plummeted, largely because of the effects of punitive U.S. tariffs. The unexpected downturn in manufacturing activity has once again renewed fears over the health of China’s domestic economy.
The People’s Bank of China (PBoC) reacted to these imbalanced circumstances by cutting major policy rates by 10 basis points. In response, the central bank lowered the reserve requirement ratio (RRR) by 50bps. This decision is intended to provide a significant boost to economic activity. Even with these measures, the economic outlook is still shaky.
With investments on new properties down 10.3% compared with the same period last year from January to April, continuing to highlight the crises of the industry. At 51.1%, the current U.S. tariffs on Chinese imports are the highest in history. At the same time, China raises its tariffs on U.S. 32.6% on average. These retaliatory tariffs have deepened the trade war and have been a large part of the new orders slowdown.
In April, China’s industrial production increased 6.1% YoY. Yet this slowdown is a story of the remarkable economic strain that has now reached our entire country. Wholesale prices posted their biggest drop in six months in September, an indication of growing deflationary forces in the economy. With consumer prices dropping for the third month in a row in April, worries are growing about consumer demand and their purchasing power.
The labor market continued to show more alarming trends, with employment contracting for the second consecutive month. Total new orders contracted for the first time in eight months, signaling a notable step back in the overall pace of manufacturing activity. Retail sales jumped 5.1% in April from a year earlier. That increase wasn’t high enough, suggesting that consumer spending will not be robust enough to drive a rebound.
Even as China’s industrial profits rose for a second straight month in April, the mood is decidedly more exuberant than it is on the mainland. Even the influential Institute for Supply Management manufacturing Purchasing Managers’ Index (PMI) has fallen below 50. That’s the first time since September 2022 that it’s dipped below the level separating expansion from contraction. This change reflects the growing trend of manufacturers’ struggles during times of unpredictable economic adversity.
Meanwhile, as economic analysts explain here, uncertainty in the external trade environment has deepened, adding to headwinds for the domestic economy. Wang Zhe, a senior economist at Caixin Insight Group, said that the situation was becoming more difficult due to changes in global trade.
“Uncertainty in the external trade environment has increased, adding to domestic economic headwinds,” – Wang Zhe, senior economist at Caixin Insight Group
As Ting Lu, Nomura’s chief China economist put it, what’s happening is a real “double-whammy.” Citing the compounding forces of decreasing demand and increasing operating costs, he laid out how the pressures are being felt in many sectors across the economy.
“This is indeed a double-whammy,” – Ting Lu, chief China economist at Nomura
In light of these challenges, Lu called for “bolder moves to clean up the mess in the property sector.” His statements highlight the imperative for decisive action to resolve the ongoing uncertainty that is poisoning the well for real estate and investment.
Falling manufacturing output, shriveling foreign orders, and a tanking employment picture give sharp-edged grimness to the state of China’s economy. This lethal combination poses profound threats to our nation’s economic prosperity. As policymakers strive to navigate these challenges, the effectiveness of their measures will be closely scrutinized in the coming months.