China Manufacturing PMI Slumps as Trade War Threatens Recovery, Job Market Weakens

US-China Trade Tensions Flare

US-China tensions escalated after the US accused China of breaching the 90-day truce by delaying rare earth mineral exports. These exports are vital to US carmakers and tech companies. The delays in approving licenses for rare earth mineral exports follow recent US restrictions on Huawei’s AI chips and a suspension of advanced chip design software exports.

Beijing reacted to Trump’s allegations of breaching the trade truce, rattling investors on Monday, June 2. According to CN Wire, China stated:

“The US side has continuously provoked new economic and trade frictions, increasing the uncertainty and instability of bilateral economic and trade relations. Instead of reflecting on itself, it has unjustly blamed China for violating the consensus and made groundless accusations, which is seriously inconsistent with the facts. China firmly rejects such unreasonable accusations.”

Despite the rhetoric, hopes for de-escalation emerged after reports suggested President Trump would speak with President Xi Jinping this week.

China Manufacturing Contracts as Trade Tensions Weigh

Recent economic indicators highlight the growing toll of trade tensions on China’s manufacturing sector. China’s Caixin Manufacturing PMI fell from 50.4 in April to 48.3 in May, falling below the neutral 50 level. According to the May survey, the PMI fell to its lowest level since Q3 2022 as new orders dropped at the sharpest pace in over two-and-a-half years. Firms attributed falling new orders to a second consecutive monthly fall in overseas orders.

Weakening demand impacted the labor market, with manufacturers cutting headcounts, undermining Beijing’s attempts to boost domestic demand through fiscal and monetary measures.

Senior Economist at the Caixin Insight Group Dr. Wang Zhe remarked:

“Currently, unfavorable factors affecting China’s economic development remain relatively prevalent. Uncertainty in the external trade environment has increased, adding to domestic economic headwinds. Major macroeconomic indicators showed a marked weakening at the start of the second quarter. The downward pressure on the economy has significantly intensified compared to preceding periods.

On Beijing’s policy measures, Dr. Zhe added:

“In terms of policy, the lasting impact of earlier measures that aimed to stimulate consumption needs further evaluation, and follow-up actions should be introduced based on actual conditions. More importantly, boosting domestic demand should be grounded in improving household incomes. As such, feasible and effective measures must be taken to improve the employment environment, strengthen social security, raise household disposable income, improve market expectations, and ultimately drive a continued economic recovery.”

Markets Eye Trade Talks

Markets reacted favorably to the news of Trump planning to speak with Xi Jinping this week. On Tuesday, June 3, the Hang Seng Index rallied 1.12% in morning trade. The CSI 300 and Shanghai Composite Index advanced 0.50% and 0.48%, respectively. However, YTD performance remains mixed. The Hang Seng Index has gained 16.75% YTD, while the CSI 300 is down 1.93%. The Shanghai Composite is up a modest 0.35%, outperforming the Nasdaq Composite Index (YTD: -0.35%).

Meanwhile, gold has soared 28.22% to $3,365 YTD, reflecting the impact of trade tensions on risk sentiment.

US-China Trade Talks Loom: Will China Concede?

This week, US-China trade developments could be crucial for global markets. However, progress toward a trade deal may hinge on China’s willingness to concede to Trump’s demand. Shaun Rein, founder of The China Market Research Group (CMR), remarked:

“Everything we (the US) make, except for semiconductors & ethane, China can make themselves or get from countries like Canada & Australia – our previous allies. China has the R word – resolve – to push back much harder than the US is willing to withstand.”

Outlook

With trade talks hanging in the balance, investor sentiment may shift rapidly. A failure to negotiate could revive steep tariff threats, including a reinstatement of 145% levies on Chinese goods and a 125% tariff on US exports. Progress toward a deal, however, would likely boost demand for Hong Kong and mainland equities.

Follow our coverage as US-China tech tensions reshape global markets.