China’s manufacturing shrank in May at the fastest rate since September 2022, driven by a sharp drop in export orders due to US tariffs, according to the Caixin/S&P Global PMI.

The index fell to 48.3, falling below the 50 threshold that separates growth from contraction and missing Reuters’ forecast of 50.6.

The decline was driven by a sharp reduction in foreign demand. New export orders fell to their lowest level since July 2023.

Overall new orders also decreased for the first time in eight months, signaling a broader decline in demand.

Employment in the sector decreased for the second consecutive month, shrinking at its fastest rate since January.

🔗 Source: CNBC

🧠 Food for thought

1️⃣ Trade tensions create predictable manufacturing headwinds with precise PMI impact

The manufacturing decline in China follows a now-established pattern where trade tensions directly impact factory activity through export orders.

When looking at historical data, this pattern is consistent with previous trade friction periods where manufacturing PMI has contracted below the 50-point threshold that separates growth from contraction 1.

The economic impact is significant but quantifiable. Goldman Sachs forecasts a 0.5 percentage point reduction in China’s GDP growth for both 2025 and 2026 specifically due to tariff effects 2.

Chinese policymakers appear to be following a predictable response playbook, with plans to increase government spending by 6 trillion RMB ($823 billion) to counteract US tariff impacts 2.

The effective US tariff rate on Chinese imports currently stands at 107%, while China’s retaliatory rate on US imports is even higher at 144%, creating substantial barriers to bilateral trade 2.

2️⃣ Manufacturing PMI measurements reveal a more complex economic story

The divergence between the official (49.5) and Caixin (48.3) PMI readings isn’t unusual and reflects fundamental differences in methodology that provide complementary insights.

The Caixin survey samples over 500 mostly export-oriented firms and is conducted mid-month, making it more sensitive to international trade disruptions, while the official PMI samples 3,000 companies and aligns more closely with industrial output 1.