Source Credit : Portfolio Prints
China's manufacturing activity expanded faster than expected in June, driven by robust demand for high-tech products linked to the global artificial intelligence investment boom. However, the property sector and consumer-focused industries continued to face significant headwinds, highlighting the uneven nature of the country's economic recovery.
The official Purchasing Managers' Index (PMI) rose to 50.3 in June from 50.0 in May, surpassing economists' expectations of 50.1 and returning to expansion territory above the 50-point threshold, according to the National Bureau of Statistics.
China's manufacturing sector has remained relatively resilient this year, with strong AI-related investment and technology demand helping offset the impact of geopolitical tensions in the Middle East. Nevertheless, sluggish domestic consumption continues to weigh on broader economic growth.
Both supply and demand improved during the month. The production sub-index climbed to 51.4, while new orders rose to 51.2. New export orders also returned to expansion, increasing to 50.1 in June as easing tensions in the Middle East improved global demand and reduced concerns over a potential energy-driven slowdown.
High-tech equipment manufacturing continued to outperform the broader industrial sector, with its PMI rising to 53.5 on the back of stronger advanced manufacturing activity. In contrast, consumer goods manufacturing remained comparatively subdued, registering a PMI of 50.2.
Julian Evans-Pritchard, Head of China Economics at Capital Economics, said external demand and AI-related investment remained the primary drivers of China's growth momentum in June, while the real estate sector continued to struggle.
The official non-manufacturing PMI, which measures activity in the services and construction sectors, edged up to 50.2 in June from 50.1 in May. However, construction activity remained in contraction, with its business activity index improving only slightly to 49.0 from the previous month's reading.
Separate data from private research firm China Beige Book indicated that the world's second-largest economy showed signs of improvement in June after two months of subdued growth, with manufacturing activity and retail sales recovering across its survey of 1,321 Chinese businesses.
Exports continued to provide crucial support to the economy as U.S. importers accelerated shipments following President Donald Trump's meeting with Chinese President Xi Jinping in May, which helped stabilize bilateral relations. Companies also moved orders forward ahead of the expiration of the 10% Section 122 tariff in July.
Meanwhile, the United States has yet to introduce additional tariffs that could result from ongoing Section 301 investigations targeting countries accused of industrial overcapacity and forced labor practices.
Separate data released over the weekend showed industrial profits rising strongly in upstream industries, as well as AI- and renewable-energy-related sectors. By contrast, downstream manufacturers continued to face pressure from weak domestic demand and cautious consumer spending.
China's domestic economy remains under strain. Retail sales declined in May for the first time in more than three years, while new home prices fell at a faster pace, underscoring the continuing drag from the country's prolonged property market downturn.
Investors are also awaiting the release of the private RatingDog Manufacturing PMI on Wednesday. The survey, which focuses more heavily on smaller and export-oriented companies, is expected to ease slightly to 51.6 from 51.8 in May, although it has historically remained above the official PMI because of stronger export performance.
Helen Qiao, China economist at Bank of America Global Research, said hopes of rebalancing the economy toward domestic consumption have weakened, as exports continue to outperform while internal demand remains subdued. The bank recently raised its forecast for China's export growth this year to 15%, citing sustained AI investment and strong global demand for renewable energy equipment and electric vehicles.
Qiao warned that the imbalance between resilient industrial supply and weak domestic demand is likely to renew downward pressure on inflation in the second half of the year once the temporary boost from higher energy prices fades.
Chinese policymakers have so far refrained from implementing significant stimulus measures to boost domestic demand, with most economists expecting policymakers to keep interest rates unchanged in the near term. Goldman Sachs expects fiscal support to increase gradually through faster government borrowing while leaving open the possibility of additional monetary easing if third-quarter economic growth falls short of expectations.
