U.S. tariffs slowed down China's manufacturing in May

A Caixin/S&P Global survey revealed Chinese manufacturing activity contracted in May to a near three-year low of 48.3, down from 50.4 in April, driven by declining overseas demand and new orders. This contraction, the lowest since September 2022, reflects the impact of trade tensions and tariffs, despite a slight improvement in business optimism regarding future trade relations. Separately, the OECD reported that U.S. import taxes are projected to negatively impact U.S. GDP growth, forecasting a decrease to 1.6% in 2025 from an initial projection of 2.2%.

Analysis

The Caixin/S&P Global manufacturing Purchasing Managers' Index (PMI) for China registered a contraction in May, falling to 48.3 from 50.4 in April, representing the lowest level since September 2022. This downturn is attributed to a significant reduction in new manufacturing orders and weakened overseas demand, directly linked to tariffs imposed by the Trump administration, leading to Chinese factory output declining for the first time in 19 months. Despite these challenges, Chinese companies conveyed a slight improvement in business optimism, expressing confidence in a future de-escalation of U.S.-China trade tensions and their capacity to develop new export markets. The prevailing trade situation involves U.S. tariffs of 30% on certain Chinese goods, scaled back from initial triple-digit levies, and a 10% retaliatory tariff by China on U.S. products, with negotiations currently stalled. Supporting the negative outlook, the Organization for Economic Cooperation and Development (OECD) revised its U.S. GDP growth projection for 2025 down to 1.6% from an earlier 2.2%, citing the adverse economic impact of U.S. import taxes.

Key Decisions for Investors

• Investors should closely monitor developments in U.S.-China trade negotiations, as any shifts in tariff policies will likely have a considerable impact on global manufacturing activity and market sentiment.
• Given the contraction in Chinese manufacturing and the OECD's downward revision of U.S. GDP growth, a cautious stance may be warranted towards sectors highly exposed to international trade and global economic cyclicality.
• Consider assessing companies within the Chinese export sector for their ability to diversify markets and mitigate the impact of U.S. tariffs, in light of the reported business optimism for securing new trade avenues.