China - May PMIs reminder of high tariffs

China Macro – Trade war escalation still visible in Caixin’s manufacturing PMI

China’s May PMIs published over the past few days show that the escalation of the trade war with the US during April is still having an effect on activity and sentiment, despite the truce reached in Geneva on 12 May. To start on the manufacturing side: this morning Caixin’s manufacturing PMI came in much weaker than expected at 48.3 (April: 50.4, consensus: 50.7), the weakest reading since September 2022. By contrast, the official manufacturing PMI published by NBS last Saturday showed an improvement, in line with expectations, climbing to 49.5 (April: 49.0, consensus: 49.5), although staying below the neutral 50 mark separating expansion from contraction. Hence, the divergence between the two manufacturing indices rose again. This divergence is likely caused by the different orientation of the two surveys (next to other more technical factors), with the Caixin survey having a stronger coverage of private, export-oriented SMEs and the larger NBS survey more concentrated on larger state-owned firms. While the weakness in Caixin’s manufacturing PMI was broad-based, the export subindex dropped further into contraction territory, reaching a 22-month low of 46.2.

Official composite PMI picks up slightly

Meanwhile, the official non-manufacturing PMI covering services and construction sectors (published last Saturday as well) edged down marginally, to 50.3 (April: 50.4, consensus: 50.5), remaining at relatively low levels just above the neutral 50 mark. The services sub-index picked up a bit to 50.2 (April: 50.1), while the construction sub-index dropped further to a four-month low of 51.0 (March: 51.9). All in all, the official composite PMI (a weighted average of the output components for manufacturing and non-manufacturing) picked up a bit, to 50.4 (April: 50.2). Caixin’s services and composite PMIs for April will be published on the 5th of June.

May PMIs a reminder that US import tariffs are much higher despite Geneva truce

While the Geneva truce has softened the direct export shock to the US, and trade circumvention and export diversification also continue to mitigate China’s overall export shock – as shown by China's April export data – , the latest PMI data are a reminder that US import tariffs on China are currently around four times higher than they were before the start of the 2nd Trump administration, at around 40% vs 10% previously (also see our May China Monthly, Geneva truce softens export shock, but uncertainty remains). Moreover, recent communication between the US and China shows that trade tensions have not disappeared, and uncertainty remains high. Allegedly, the US is looking for opportunities to organise a call between presidents Trump and Xi soon. Meanwhile, given the ongoing challenges on the domestic front – with no clear signs of success in breaking the negative feedback loop from property to domestic demand – next to the external drags, we assume Beijing will continue with adding monetary easing and fiscal stimulus.