CICC released a research report commenting on China's May PMI data. The official manufacturing PMI fell 0.3 percentage points month-on-month to 50.0%, aligning with market expectations. The non-manufacturing business activity index rose 0.7 percentage points to 50.1%, while the composite PMI output index increased 0.4 percentage points to 50.5%. The data indicates a renewed contraction in demand and a widening divergence across sectors. Multiple factors are driving this trend: persistent energy supply shocks, continued tailwinds for emerging industries from external demand and AI trends, and ongoing weakness in domestic demand. CICC's key views are as follows:

Demand has re-entered contractionary territory, and sector divergence has widened. The new orders sub-index fell 0.7 percentage points month-on-month to 49.9%, moving back into contraction. The production sub-index declined 0.3 percentage points to 51.2%, maintaining some resilience. The gap between demand and supply has widened. The degree of divergence across industries has also increased further. The PMI for high-tech manufacturing and equipment manufacturing rose by 0.7 and 0.3 percentage points to 52.9% and 52.1% respectively, remaining firmly in expansionary territory. Conversely, the PMI for consumer goods and high-energy-consuming industries fell by 1.0 and 0.8 percentage points to 49.7% and 47.1%, respectively, placing them in contraction. This divergence is evident at a more granular level. Statistics indicate that production and new order indices for industries like pharmaceuticals, railway/ship/aerospace equipment, and computers/communications/electronic equipment all exceeded 53.0%, showing robust activity on both supply and demand sides. In contrast, indices for industries such as petroleum/coal/other fuel processing, chemical fibers/rubber/plastics products, and non-metallic mineral products remained below the 50-point threshold, indicating continued weakness in both supply and demand.

Several factors are driving this sectoral divergence. First, energy supply shocks persist. Ongoing conflicts in the Middle East continue to impact energy supply. Although the month-on-month increase in the raw material purchase price sub-index moderated, it remains at a high level. Both raw material purchase prices and ex-factory prices fell by 3.2 percentage points to 60.5% and 51.9%, respectively. Ex-factory prices continue to lag purchase prices, indicating sustained pressure on profit margins for midstream and downstream industries from energy costs. These shocks are amplified through global supply chains. The suppliers' delivery time sub-index fell 0.3 percentage points to 49.2%, indicating further lengthening of delivery times. However, compared to the supplier delivery time indices in the May manufacturing PMIs for the US, Eurozone, and Japan, China's supply chain advantages have helped cushion the impact. The energy supply shock has negatively affected the supply side of high-energy-consuming industries like petroleum/coal/other fuel processing, chemical fibers/rubber/plastics products, and non-metallic mineral products.

Second, external demand and trends like AI continue to drive emerging industries. The new export orders sub-index fell 1.7 percentage points to 48.6%. This decline is attributed partly to a high base effect from short-term overseas inventory replenishment in April, which may have slowed marginally in May, as suggested by the 0.7 percentage point drop in the raw material inventory sub-index to 48.6%. Additionally, current external demand shows structural characteristics, with strong momentum in sectors like AI and new energy supporting high-tech and equipment manufacturing, particularly computers/communications/electronic equipment manufacturing. Traditional sectors appear weaker, likely impacted by high oil prices.

Third, domestic demand remains weak. The services business activity index rose 0.7 percentage points to 50.3%, but its absolute level is still low, with the May Day holiday providing a significant seasonal boost. Underlying consumer demand is likely still weak, weighing on the consumer goods manufacturing PMI. Beyond the ongoing property sector adjustment, high oil prices may also be suppressing demand. The input price sub-index for the services sector rose 0.8 percentage points to 52.0%. Data shows business activity indices for air transport and real estate remained below the 50-point threshold, indicating low activity levels in these sectors. The construction business activity index rose 0.8 percentage points to 48.8%, yet it remains at the lowest level for the same period in recent history, showing only marginal improvement from a very low base. This also partially contributed to the weak PMI reading for high-energy-consuming industries in May.