China’s manufacturing sector contracted in May at its fastest pace since September 2022, according to a private survey. This decline is attributed to weakening demand and high raw material costs.
Key Findings
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The Caixin/S&P Global manufacturing purchasing managers’ index (PMI) registered at 48.3 in May, falling short of the median estimate of 50.6. This marks the first time since September of the previous year that the index has dipped below the crucial threshold of 50, which indicates growth versus contraction.
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The sharper-than-expected decline reflects a significant weakening in demand for goods produced in China, exacerbated by global economic uncertainties, rising inflation, and increasing interest rates.
Expert Insights
Wang Zhe, a senior economist at Caixin Insight Group, commented on the situation:
- "We expect further improvement going forward as production capacity utilization continues to rise. However, uncertainties surrounding global demand and commodity prices may lead to some volatility ahead."
Additional Observations
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New Orders: Total new orders fell by their largest margin since July of the previous year, indicating a significant drop in foreign demand amid rising uncertainties related to trade policies and geopolitical tensions.
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Export Orders: New export orders decreased by nearly half compared to March levels, primarily due to high raw material costs and restrictive U.S. tariffs on Chinese goods, particularly semiconductors used in electronics.
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Employment Trends: Employment in the manufacturing sector continued to decline, with factories shedding jobs at the fastest rate since January. This trend is attributed to labor shortages and waning business confidence. Wang noted that firms are reducing hiring efforts due to:
- Weak sales forecasts
- Labor shortages
- Factory closures
- Delayed projects
- Lackluster consumer spending power
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Inventory Levels: Finished goods inventory increased in May after a four-month decline, largely due to falling sales and delayed outbound shipments. Wang warned that this accumulation could lead to price cuts or discounts in the future.
In summary, the contraction of China’s manufacturing sector highlights significant challenges ahead, driven by both domestic and international factors.
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