China factory activity stalls in May as new export orders shrink

China’s ‌factory activity stalled in May as new export orders contracted and input costs kept rising, an official survey showed on ​Sunday, adding to concerns the world’s second-largest economy is losing momentum despite pockets of strength in services and high-tech manufacturing.

The official ‌manufacturing purchasing managers’ index (PMI) dropped to 50 from ‌50.3 in April, matching the forecast in a Reuters poll of economists and straddling the 50-mark separating growth from contraction, according to a survey by the National Bureau of Statistics (NBS).

It was the lowest reading in three months and followed data earlier in May showing China’s growth momentum ‌cooled in April despite a rebound in exports.

Supply improved while demand weakened, as the sub-indexes for production and new orders came in ⁠at 51.2 and 49.9 in the manufacturing PMI survey.

New export orders fell more sharply, dropping to 48.6 from 50.3 in April, heaping pressure on policymakers to reduce the economy’s reliance on overseas demand and strengthen domestic consumption.

“The slowdown in foreign demand was particularly prominent ... mainly due to a marked contraction in the exports from the consumer goods manufacturing sector,” said Wen Tao, an analyst at the China Logistics Information centre.

Weakness in the property market, employment and consumer spending continues to dampen growth, leaving China reliant on global demand to absorb ​goods produced by its manufacturing sector.

China’s government has vowed to address the supply-demand mismatch and has set a less ‌ambitious GDP growth target for 2026, allowing more room for reforms.

External pressures have added to the strain on manufacturers. The U.S.-Israeli war with Iran, which started in late February and led to the effective closure of the strategic Strait of Hormuz, has sent energy prices surging, threatening to squeeze manufacturers’ profits as costs soar.

The gauge for raw material prices in the manufacturing PMI survey came in at 60.5, down from 63.7 in April but still well above the 50-point mark, suggesting input costs continued to rise, albeit at a slower pace.

“The purchase price ​index remained in ‌expansionary territory, showing that raw material prices continued to rise, which also kept prices at the product end increasing,” Wen said.

For Chinese ‌manufacturers, external factors have had an uneven impact. The petrochemical sector and other upstream industries have borne the brunt of imported producer price inflation, but stockpiling by buyers concerned about further cost hikes as well as global demand for semiconductors and other AI-related goods have bolstered advanced manufacturing.

High-tech and equipment ‌manufacturing outperformed the overall sector ‌in May, logging PMI readings of 52.9 and 52.1, NBS data showed. Activity in high-energy-consuming industries, meanwhile, contracted.

A summit between Chinese and US leaders in Beijing in mid-May did ‌not result in an extension of the trade truce the two governments reached late last year, although the two sides agreed to explore areas for tariff cuts on goods worth some $30 billion from each.

The non-manufacturing PMI, which includes services and construction, rose to 50.1 from 49.4 in April, NBS data showed, helped by a surge in travel spending ​during the five-day May Day holiday at the start of the month.

The services activity gauge improved to 50.3, its highest in nine months, suggesting Beijing’s push to expand the services sector may be gaining some traction as policymakers seek to offset sluggish demand for manufactured goods.

Meanwhile, the European Central Bank must act on inflation ‌sooner rather than later, ECB ​Governing Council member Alvaro Santos Pereira ‌told Portugal’s ‌Antena 1 broadcaster on Saturday.

“Our concern right now is inflation; ‌we need to look at ⁠the data very closely. But I also think, looking at what happened in the past, that we need to act sooner ​rather than later, to avoid a ‌greater second-round impact,” said Pereira, who is also governor of the Bank of Portugal.

“When there is an inflationary spiral, I prefer ​that ‌we act swiftly and decisively.” Asked ‌whether that meant that he would support an interest rate hike at ‌next month’s ‌ECB meeting, he said: “We will have new ‌ECB estimates and data from different countries, we will look at what ​is happening with prices and then we will make a decision.” Austria’s coalition government said on Saturday it ‌will further shrink its recently introduced “petrol ​price brake”, an inflation-fighting measure aimed ‌at cushioning ‌consumers from the rise in oil prices caused by the ‌Iran war.

The mechanism, which combines trimming retailers’ margins and returning an increased value-added tax take from higher fuel prices to consumers in the form of ​lower petrol tax, requires the ‌government to set the size of those two elements each month.

Currently the reduction in margins is set at 2.5 euro ​cents (2.9 ‌cents) per litre ‌and the tax reduction at 2 cents per litre. From June ‌1, the ‌margin cut will be scrapped and ‌the tax reduction trimmed to 1.7 cents per litre, the economy ministry said ​in a statement.

Agencies