US Tariffs Weight On Industry In China: Growth Remains Weak
US tariffs and weak domestic demand continue to weigh on industry in China. Margin pressure, job cuts and supply problems are dampening the already fragile recovery.
The Caixin Purchasing Managers' Index for June published today shows a surprisingly positive picture of Chinese industry. At 50.4 points, it is just in expansion territory. However, at 49.7 points, the official PMI of the National Bureau of Statistics (NBS) remains below the growth threshold of 50.0 for the fourth month in a row. While the Caixin index signals a slight recovery, the government report paints a weaker picture. However, the apparent improvement in the manufacturing sector signaled by the Caixin PMI has come at a high price.
Special promotions support production, weigh on profits
The strongest increase in production since November last year is based less on genuine demand than on increased sales promotions. Companies are relying on discounts and special promotions to secure orders. This is leading to strong pressure on margins. Input prices are falling for the fourth month in a row, while sales prices are falling at the fastest rate in five months. This deflationary pressure is forcing companies to sacrifice their profits in order to survive in the market. The situation is worsening in the consumer goods sector in particular, which has been hit hardest by the US tariffs.
The NBS PMI, on the other hand, attempts to put a positive spin on this mixed situation. Despite the negative overall index of 49.7 points, the report speaks of a "revival in demand" and "improved production". At 51.0 points, the production index is in growth territory, with new orders reaching 50.2. However, employment (47.9) and export orders (47.7) remain clearly negative. The tonality is striking: the report ignores the impact of US tariffs and makes no mention of weak domestic demand or geopolitical tensions. Instead, it focuses on marginal progress and conveys the impression of a stable recovery. This positive language has the effect of deliberately distorting sentiment and concealing structural problems in the industry.
Fewer jobs, more uncertainty in production
The labor market is also suffering. Employment is shrinking for the ninth time in ten months. In the consumer goods industry in particular, companies are laying off staff to cut costs. At the same time, order backlogs are growing, not because of a boom in demand, but due to staff shortages. Many companies are reaching the limits of their capacity because they have cut jobs or not filled them. This trend shows how deep the uncertainty in the industry runs. Business expectations for the next twelve months have fallen and are below the historical average. Companies are skeptical about the future, characterized by trade conflicts and weak domestic demand.
The supply chain situation is exacerbating the problems. While the NBS PMI reports shorter delivery times, which indicates falling demand or relaxed logistics, the Caixin PMI reports delays. Logistical bottlenecks and material shortages are slowing down production. This discrepancy underlines the different perspectives of the reports. The Caixin PMI, which gives more weight to smaller and private companies, reflects the reality of businesses competing directly with global markets. The NBS PMI, which focuses on large, often state-owned companies, tends to ignore negative trends.
Tariffs and sluggish consumption hit production twice over
The trade war with the USA is the main driver of this weakness. The run that was triggered by the pause in the tariff dispute was not as strong as hoped and new orders are difficult to acquire due to the uncertain situation. At the same time, domestic demand remains weak, as the real estate crisis and high household debt are slowing down consumption. Government stimuli, such as infrastructure investments or subsidies, have only had a limited effect so far. The Caixin PMI does emphasize the hope of a recovery through such measures. Without a solution to the trade conflict or strong domestic demand, the recovery remains fragile.
The Caixin PMI only offers a more positive picture of Chinese industry at first glance than the government PMI, whose positive tone reflects political objectives rather than economic facts. US tariffs are weighing on the export economy, while margin pressure and a weak labor market are further weakening companies. Logistical problems and falling business expectations are further clouding the outlook.
This is a very insightful analysis highlighting the mixed signals in China’s industrial sector. The contrast between the Caixin PMI and the official NBS PMI really shows how different segments of the economy are experiencing pressure differently.