Supply-demand dynamics, characterized by strong supply and weak demand, continue to pose a significant constraint on the economic recovery.
As external demand peaked and then declined, China's manufacturing Purchasing Managers' Index (PMI) fell back in May. However, the manufacturing sector overall maintained stable operation, with positive developments observed in production activities, market prices, and industrial structure, indicating continued progress towards stability, innovation-driven growth, and quality improvement.
The latest data from the National Bureau of Statistics, released on May 31, shows that the manufacturing PMI for May was 50.0%, a decrease of 0.3 percentage points from the previous month. The non-manufacturing business activity index and the composite PMI output index stood at 50.1% and 50.5%, respectively, rising by 0.7 and 0.4 percentage points from the previous month, indicating that China's overall economic output continues to expand.
Zhang Liqun, a special analyst at the China Federation of Logistics & Purchasing, noted that the slight decline in the manufacturing PMI for May suggests that the momentum for economic growth still needs reinforcement. The drop in order-related indices indicates that insufficient demand remains a prominent issue. Consequently, indices such as the production index and purchasing volume have also declined, and the production and business activity expectation index has fallen. The pattern of strong supply and weak demand continues to significantly constrain the economic recovery.
Zhang Liqun stated that in response to this situation, more proactive and effective macroeconomic policies should be intensified promptly based on their ongoing implementation. In particular, it is crucial to fully leverage the key driving role of government public product investment, focusing on projects related to the "six networks" and urban renewal. Significantly increasing financial and credit support is necessary to quickly boost the growth rate of infrastructure investment. This would stimulate increased corporate orders, more active production and investment, and job creation, thereby promoting a sustained recovery in consumer spending and accelerating the reversal of the constraints imposed by the strong supply-weak demand dynamic on the economic recovery.
**Manufacturing Production and Demand Slow Down**
An analysis of the sub-indices and sector-specific indices of the manufacturing PMI reveals that in May, overall market demand showed a slight moderation while remaining generally stable. However, production activities continued to expand, corporate cost pressures eased somewhat, and new growth drivers accelerated their expansion.
In May, the new orders index for the manufacturing sector was 49.9%, down 0.7 percentage points from the previous month, indicating a steady yet slightly slowing trend in manufacturing market demand. The slowdown in external demand was relatively pronounced, with the new export orders index at 48.6%, a decrease of 1.7 percentage points from April. This was mainly due to a significant contraction in exports for consumer goods manufacturing, whose new export orders index fell by 4.8 percentage points to below 49%.
Wen Tao, an expert from the China Logistics Information Center, explained that the manufacturing new orders index remains close to the 50% threshold, primarily due to the stable release of domestic demand, which solidifies the foundation for economic momentum and underpins a stable base for market demand. The new orders index for consumer goods manufacturing also hovered near the 50% level, suggesting that while exports in this sector declined noticeably, overall demand remained relatively stable, supported by consumption during the May Day holiday.
In May, manufacturing production activities maintained an expansionary trend, with the production index at 51.2%, down 0.3 percentage points from the previous month but remaining above 51% for the third consecutive month. Despite continued production expansion, the slight moderation in market demand led to an emerging supply exceeding demand, which exerted some pressure on finished goods inventory. The finished goods inventory index rose by 1.8 percentage points to 49.3%, indicating a narrowing decline in inventory and a slowdown in product outflows.
Regarding prices, the purchasing price index for May was 60.5%, down 3.2 percentage points from April, showing a slowdown in the growth of manufacturing raw material prices from high levels. A survey of enterprises revealed that the proportion of manufacturing firms reporting high raw material costs decreased by 1.9 percentage points to 33.1%.
Wen Tao analyzed that the reasons are twofold: first, prices of some bulk commodities like crude oil retreated from their April levels; second, the supporting effect of manufacturing raw material procurement activities on prices weakened. However, the purchasing price index remains in expansionary territory, indicating that raw material prices continue to rise, thereby driving up product-side prices as well. The ex-factory price index was 51.9%, down 3.2 percentage points but still in expansionary territory.
Wen Tao forecasts that manufacturing will operate with steady growth in June, with the business climate expanding moderately. Supporting factors include: first, policies aimed at stabilizing and promoting economic growth will continue to exert force. As policies related to the "two new initiatives" and "six networks" take effect, they are expected to generate substantial incremental demand in domestic manufacturing supply and demand, effectively driving economic development. Second, new growth drivers will continue their stable and positive development trend. June is a peak season for infrastructure and major project construction in China, overseas demand for Chinese equipment remains expansive, and the rapid development of artificial intelligence continues to contribute momentum to the high-tech manufacturing sector.
Data shows that manufacturing enterprises maintain a relatively optimistic outlook for the future. The production and business activity expectation index for May was 53.9%, the second-highest level this year. The expectation indices for equipment manufacturing and high-tech manufacturing operated at relatively high levels above 57% and 55%, respectively, indicating that new growth driver industries are particularly optimistic about the future market.
**Non-Manufacturing Business Climate Rebounds**
China's non-manufacturing business activity index for May was 50.1%, up 0.7 percentage points month-on-month. Both the construction and service sector business activity indices improved compared to April.
In May, the construction business activity index was 48.8%, an increase of 0.8 percentage points from the previous month. Within this, the business activity index for housing construction, while still below 50%, rose from April. The business activity index for civil engineering construction dipped slightly month-on-month but remained above 52%.
Wu Wei, an expert from the China Logistics Information Center, stated that the overall business climate level of the construction industry improved in May, with infrastructure-related activities in particular continuing to expand. As demand related to urban renewal and the "six networks" construction continues to be released, infrastructure investment is expected to sustain its role in stabilizing growth. Looking at expectations, the business activity expectation index for civil engineering construction rose by over 4 percentage points from April to above 55%, reaching a new high for the year, indicating increased optimism among civil engineering firms.
Wu Wei pointed out that in the future, as policy dividends in the infrastructure construction sector are concentratedly released, the pace of major project implementation will accelerate, which is expected to effectively boost overall industry demand and bring positive impacts to corporate operations and development.
In the services sector, the concentrated release of consumption demand during the May Day holiday boosted business sentiment in related consumer industries. The business activity index for railway transportation rose significantly from April to above 60%, indicating strong resident willingness to travel. The business activity index for scenic area services ended a two-month run below 50%, rising to above 50%, showing increased resident activity in scenic area visits. The business activity index for the catering industry rose by over 5 percentage points from April to above 51%.
Wu Wei noted that the non-manufacturing business climate improved in May, with consumption and investment maintaining stable operating trends, indicating a sound foundation for economic growth. On this basis, it is essential to continue fully unleashing policy effectiveness, strengthen innovation-driven leadership, focus on cultivating the endogenous drivers for investment and consumption growth, comprehensively solidify the foundation for steady economic growth, and continuously enhance the quality and efficiency of economic development.
Wang Qing, Chief Macro Analyst at Dongfang Jincheng, stated that the overall growth momentum in the services sector remains relatively weak. This is directly related to the ongoing adjustment in the real estate sector, a significant component of services, and also reflects insufficient consumer confidence. Service consumption areas such as tourism, travel, catering, accommodation, and cultural entertainment need further stimulation. In the short term, the services PMI still faces some downward pressure, implying that policies aimed at stabilizing the real estate market and vigorously promoting service consumption in the second half of the year require further intensification.