China's factory activity ground to a halt in May, according to the official purchasing managers' index (PMI) released Sunday. The headline reading of exactly 50 — the line between expansion and contraction — matched a Reuters poll forecast and marked the lowest level in three months, as new export orders fell sharply and input costs remained stubbornly high.. While non-manufacturing sectors showed modest growth, the data paints a picture of an economy increasingly reliant on a narrowing set of growth engines.

PMI stuck at 50 — the weakest reading since February

The official manufacturing PMI for May came in at 50.0, down from 50.3 in April, according to the survey published by China's National Bureau of Statistics. This stall came after earlier data had already indicated cooling momentum in April, despite a rebound in exports. The production subindex managed to stay in expansion at 51.2, but the new orders subindex slipped below the 50 threshold to 49.9, signaling weakening domestic demand. The most telling component was the new export orders subindex, which fell to 48.6 from 50.3 a month earlier, confirming that foreign demand — long a crutch for Chinese manufacturers — is softening.

Export orders drop to 48.6 — cosnumer goods lead the retreat

The contraction in new export orders was concentrated in consumer goods manufacturing, analysts noted in the report. The subindex's slide from expansion to contraction territory suggests that Western retailers and end consumers are pulling back orders, possibly in anticipation of slower economic growth or renewed tariff uncertainty. The May reading of 48.6 is the lowest since early 2024, raising concerns that the export-led recovery may be running out of steam. according to the official survey, the consumer goods sector was the primary driver of the export order decline, offsetting still-robust demand for advanced manufacturing goods like semiconductors and AI-related equipment.

Raw material costs at 60.5 — a lingering squeeze on profits

Input cost pressures, while easing slightly from April's 63.7, remained severe in May. The raw material price gauge stood at 60.5, well above the 50 mark, indicating that manufacturers are still contending with soaring energy and commodity prices. The report ties this to geopolitical turmoil: the conflict between the U.S., Israel, and Iran, which began in late February and effectively closed the Strait of Hormuz, has sent energy prices surging. Analysts quoted in the report observe that rising raw material costs are being passed through to product prices, potentially cooling demand further. the impact has been uneven — upstream industries like petrochemicals are absorbing the worst of imported inflation, while buyers stockpiling ahead of expected price hikes have provided a buffer for some sectors.

High-tech manufacturing at 52 .9 — a bright spot amid the stall

While headline manufacturing flatlined, high-tech and equipment manufacturing posted PMI readings of 52.9 and 52.1, respectively, according to the survey. These sectors were buoyed by global demand for semiconductors and AI-related goods, as well as precautionary stockpiling by companies fearing further cost increases. In contrast, high-energy-consuming industries contracted, underscoring the uneven nature of China's industrial landscape. the non-manufacturing PMI — covering services and construction — rose to 50.1 from 49.4, helped by a surge in travel spending during the five-day May Day holiday. The services activity gauge hit 50.3, its highest in nine months, suggesting that Beijing's push to expand the services sector is partly offsetting weak manufactured goods demand.

What's missing: a US-China trade truce extension and a timeline for relief

The source reports that a mid-May summit between Chinese and U.S. leaders did not extend the trade truce from late last year, even as both sides agreed to explore tariff cuts on approximately $30 billion worth of goods from each side. This leaves a key open question: will the tariff reprieve materialize quickly enough to revive export orders, or will the uncertainty continue to drag on factory activity? Another unknown is how long the services sector momentum can sustain itself if manufacturing weakness persists and consumers remain cautious with spending. The report does not provide forward guidance from policymakers beyond the government's acknowledged mismatch in growth drivers and its less ambitious GDP target for 2026.