China's manufacturing sector maintained its expansion in May, with robust growth in new orders and output, while input price inflation saw its first moderation in six months. As supplier delivery times lengthened again, manufacturers increased their input inventories. The latest S&P Global and RatingDog Purchasing Managers' Index (PMI) for China, released on June 1, showed the RatingDog Manufacturing PMI for May at 51.8, remaining above the 50-point mark that separates expansion from contraction for the sixth consecutive month. Concurrently, the rate of increase in both input and output prices slowed, providing some relief to manufacturers' cost environment.

The index has now been above the 50-point threshold for six straight months. Yao Yu, founder of RatingDog, noted that while manufacturing continued to expand in May, the pace moderated. The sustained slowdown in demand growth and the softening of export orders are key risks to monitor.

The most notable change in this survey pertains to prices. The input price index and the output price index both registered month-on-month declines for the first time in six and seven months, respectively, indicating a marginal easing of inflationary pressures and offering manufacturers some breathing room after a period of sustained cost increases.

However, the rate of increase in input prices remains above the long-term historical average, with rising costs for raw materials and energy, supply chain disruptions, and international tensions continuing to be primary drivers.

Demand and Output: Expansion Continues, Pace Moderates New orders in China's manufacturing sector continued to grow in May, albeit at a slower pace compared to April, but remained within a relatively high range for the past five years. Manufacturers attributed the improvement in orders to recovering market demand, product upgrades, new customer acquisition, and promotional activities.

Notably, new export orders saw a slight decline in May, contributing less to the overall new order growth, yet the overall rate of new order growth remained above the long-term average.

Regarding output, production in the manufacturing sector continued to expand in May. Although the growth rate slowed from the 22-month high reached in April, it still represented the third-strongest pace since the second half of 2024.

The continued inflow of new orders drove unfinished work to increase for the fourth consecutive month, further expanding the backlog, although the rate of backlog accumulation remained below the long-term trend level.

Prices and Supply Chain: Marginal Easing of Cost Pressures The easing of inflationary pressures is a central theme of this survey. Both the input price and output price sub-indices declined month-on-month in May, for the first time in six and seven months, respectively.

Yao Yu pointed out that this change provides a positive signal for corporate cost and pricing environments. However, input prices are still rising at a faster rate than the long-term average, indicating that overall cost pressures have not fundamentally subsided. The impact of elevated raw material and energy prices, supply chain disruptions, and international conflicts continues.

On the supply chain front, supplier delivery times lengthened again in May, marking the third consecutive month of extension, although the overall extent of delays remained moderate. Faced with delivery delays, manufacturers proactively increased inventories to mitigate risks, with purchasing activity rising for the fifth straight month and input inventories increasing for the sixth consecutive month.

Employment and Sentiment: Slight Contraction in Staffing, Optimistic Outlook Maintained On the employment front, the number of manufacturing staff saw a slight decrease in May, with the overall decline being limited. Consumer goods firms bucked the trend by increasing hiring, which partially offset job cuts in other sub-sectors, keeping the overall employment contraction marginal.

Regarding the outlook, manufacturers remained optimistic about output growth over the next 12 months, although the degree of optimism dipped slightly compared to April, roughly aligning with the average level seen this year.

Surveyed firms attributed their positive expectations primarily to anticipated improvements in market demand, increased new orders, business expansion, new customer acquisition, and optimized sales channels. Some companies also cited favorable factors such as new product launches, technological breakthroughs, and increased production capacity.

Key highlights include the simultaneous slowdown in the rate of increase for both input and output prices, indicating a marginal easing of inflationary and cost pressures for firms. Additionally, firms increased inventories in response to lengthening delivery times. Employment saw a slight decline, but market prospects remain optimistic.