May 2025 brought mixed signals for the Chinese economy, according to the latest data from the National Bureau of Statistics (NBS). The overall Purchasing Managers' Index (PMI) slightly rose to 50.4, indicating continued, albeit modest, expansion of economic activity. However, behind this overall figure lies divergent trends in key sectors, as well as a noticeable impact from the recent trade truce with the US.
Manufacturing: A ray of light, but the clouds have not dispersed
China's manufacturing sector, long a driver of growth, showed signs of improvement in May. The PMI index for this sector rose to 49.5 from April's 16-month low of 49.0. Although this matched market expectations, a value below 50 still signals a contraction in activity for the second consecutive month.
What caused this timid optimism? Firstly, production has actually grown (subindex 50.7 compared to 49.8 in April), moving into the expansion zone. Secondly, the trade truce reached on May 12 in Geneva played its role. Recall that the US reduced tariffs on Chinese goods from 145% to 30%, while China responded by reducing tariffs on American goods from 125% to 10%. Enterprises are already reporting an 'acceleration of the restart of foreign trade orders.' This is confirmed by a significant increase in the subindices of new export orders (up to 47.5 from 44.7) and imports (up to 47.1 from 46.3).
However, not everything is smooth. New orders overall (49.8) and employment (48.1) have improved but are still in the contraction zone. Price dynamics are also concerning: both input and output prices in manufacturing showed the sharpest decline in eight months, which may indicate weak demand.
Interestingly, large enterprises feel more confident (PMI 50.7, up 1.5 points), while medium (47.5) and small (49.3) businesses are still struggling for survival, despite some improvement among the latter. A positive aspect remains steady growth in high-tech manufacturing (PMI 50.9).
Services sector: There is growth, but the pace is slowing
In contrast to manufacturing, the services sector, which has increasingly pulled the blanket of economic growth in recent years, showed a slowdown in May. The non-manufacturing PMI fell to 50.3 from 50.4, reaching a 4-month low.
Despite the slowdown, the sector is still in the expansion zone. The 'Labor Day' holiday supported areas related to travel and dining. Industries such as rail and air transport, postal and telecommunications services, as well as the IT sector, are showing steady growth (activity indices above 55.0).
However, there are also alarming signals. New orders (46.1) and external demand (48.0), while contracting at a slower pace, are still not in positive territory. Employment remained weak (45.5). The construction sector (51.0) also slightly slowed its pace of expansion. Analysts link the slowdown in services partly to concerns about ongoing, albeit reduced, American tariffs. Business confidence in the services sector, while remaining high (55.9), has slightly decreased to an 8-month low.
Key factors: Trade thaw and internal challenges
It is clear that the temporary trade truce with the US has been a breath of fresh air for the Chinese economy, especially for its manufacturing and export-oriented segments. The improvement in business confidence in the manufacturing sector (52.5 from 52.1) is also largely related to this factor.
At the same time, PMI data highlights ongoing internal challenges. Beijing continues efforts to stimulate domestic demand, but the new order indicators in both manufacturing and services, remaining below 50, indicate that this work is far from complete. Weakness in the labor market is also a restraining factor.
What does this mean for the markets?
The PMI data for China in May 2025 paints a picture of an economy trying to find solid ground after a period of uncertainty. Improvement in the manufacturing sector, largely driven by the trade pause, gives grounds for cautious optimism. However, the slowdown in the services sector and the ongoing weakness of domestic demand and the labor market indicate that the path to sustainable recovery has not yet been traversed.
For investors and market participants, this means that it is necessary to closely monitor the further development of trade relations between the US and China, as well as the effectiveness of measures taken by the Chinese government to stimulate the economy. Stability and predictability in foreign trade will be key to maintaining positive trends in the manufacturing sector, while for the services sector and overall economic growth, strengthening domestic demand will be crucial.
