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China's Manufacturing Slump Continues Amid Trade Uncertainty

9/1/2025
China's manufacturing activity shrank for the fifth consecutive month, signaling uncertainty in the trade deal with the U.S. and sluggish domestic demand. Economists warn of challenges to Beijing's growth targets.
China's Manufacturing Slump Continues Amid Trade Uncertainty
China's manufacturing sector faces its fifth month of contraction as trade uncertainties and weak demand weigh heavily on the economy. What’s next for China?

China's Manufacturing Activity Declines for Fifth Consecutive Month in August

In a recent report released by the National Bureau of Statistics (NBS), China's manufacturing activity has contracted for the fifth consecutive month as of August. This ongoing decline suggests that producers are holding off on significant investments and production decisions while awaiting more clarity on the ongoing trade negotiations with the United States. Additionally, sluggish domestic demand continues to weigh heavily on the sector.

Official Purchasing Managers' Index (PMI) Remains Below Growth Threshold

The official Purchasing Managers' Index (PMI) for August rose slightly to 49.4, up from 49.3 in July. However, this figure remains below the critical 50-mark, which separates growth from contraction, and it falls short of the median forecast of 49.5 predicted by a Reuters poll. This underwhelming performance signals ongoing challenges in the manufacturing sector as the economy grapples with various pressures.

Challenges Facing China's Economy

China's economy is currently facing a multitude of challenges, including weakening exports due to U.S. tariffs, a downturn in the property sector, rising job insecurity, and heavily indebted local governments. Furthermore, extreme weather conditions have added to the strain. According to economists, these factors pose a significant threat to Beijing's ambitious growth target of around 5% for 2025.

Non-Manufacturing Sector Shows Signs of Growth

In contrast to the manufacturing sector, the non-manufacturing PMI, which encompasses services and construction, has shown improvement, rising to 50.3 in August from 50.1 in July. The composite PMI, which combines both manufacturing and non-manufacturing, also increased slightly to 50.5 in August, up from 50.2 in July.

Impact of Weak Domestic Demand and Cooling Property Market

According to Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, China's economic momentum has slowed in the third quarter, primarily due to persistently weak domestic demand and a cooling property market. The overall macroeconomic outlook for the remainder of the year relies heavily on the sustainability of exports and whether fiscal policy will adopt a more supportive stance in the fourth quarter.

Export Trends Amid Trade Tensions

While July exports exceeded expectations, this surge was largely attributed to a low base and a significant increase in shipments to Southeast Asia. Chinese exporters are actively seeking to expand their market share in this region amid concerns of losing access to the U.S., the world's largest consumer market. This frantic effort has been described by some producers as a "mad rat race."

Tariff Truce Extended but Confidence Eroding

Earlier this month, the U.S. and China agreed to extend their tariff truce for another 90 days, maintaining the current levies of 30% on Chinese imports and 10% on U.S. goods. However, the ongoing uncertainty surrounding trade relations is diminishing confidence on both sides of the Pacific.

Declining Profits and Consumer Spending Concerns

Official data indicates that profits at China's industrial firms have decreased for three consecutive months as of July. This decline underscores the challenges businesses face due to subdued demand and persistent factory-gate deflation. As a result, there is mounting pressure on Beijing to implement additional economic stimulus measures.

Impact of Property Slump on Household Spending

While policymakers have increased consumer subsidies to stimulate spending, the prolonged slump in the property market continues to hinder consumer confidence, as real estate is a significant component of household wealth. This reluctance to take out mortgages is evident in July's bank lending data, which unexpectedly contracted for the first time in 20 years.

Potential Job Losses and Rising Unemployment Rates

Recent rulings by China's top court, which ban companies and employees from evading social insurance payments, may further impact consumer spending, potentially leading to job losses. Many businesses and workers are already struggling to make ends meet, contributing to a rise in urban unemployment, which increased to 5.2% in July from 5% in June.

Looking Ahead: Analysts' Predictions

As the economic landscape continues to evolve, analysts surveyed by Reuters predict that the private sector RatingDog PMI will show a slight improvement, coming in at 49.7, up from 49.5 in the previous month. The data is expected to be released on Monday, providing further insights into the state of China's economy.

In summary, as China navigates through these economic challenges, the focus remains on the delicate balance of trade relations, domestic demand, and the ongoing recovery of the manufacturing sector.

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