China’s manufacturing activity contracts for a third month amid deflation woes

China’s manufacturing activity contracted for a third straight month in June, an official survey showed on Monday, fueling hopes for more stimulus to cushion the impact of ongoing trade disruptions.

The official purchasing managers’ index (PMI) improved slightly to 49.7 in June from 49.5 in May but stayed below the 50-benchmark separating expansion from contraction. That figure was in line with analysts’ forecast of 49.7 in a Reuters poll.

The non-manufacturing PMI, which includes services and construction, rose to 50.5 from 50.3 in May.

Chinese manufacturers have been grappling with a deepening price war amid a supply glut and sluggish consumer demand, exacerbated by higher U.S. tariffs that dwarfed its exports to the world’s largest consumption market.

The country’s shipments to the U.S. plunged 34.5% in May from a year ago and over 21% in April, as exporters pivoted to alternative markets to avoid an eye-watering triple-digit tariff that had kicked in briefly before it was rolled back mid-May.

Chinese Premier Li Qiang said in an address at a key economic forum in Tianjin last week that Beijing was stepping up efforts to boost domestic demand in what would make China a “consumption powerhouse.”

Consumer prices have also been mired in deflation this year, falling 0.1% in May from a year earlier.

A gauge on the wholesale prices, or producer price index, saw the biggest drop since July 2023 in May, deepening a deflation that has imperiled the manufacturing sector for over two years. Chinese industrial firms’ profits plunged 9.1% in May, their sharpest drop in seven months.

On Friday, China’s commerce ministry said Beijing had reached an agreement with Washington on further details of the existing trade framework, noting that China would review and approve eligible applications for export of controlled items, while the U.S. would correspondingly cancel a series of restrictive measures against China.

While the statement was viewed as an encouraging sign that the bilateral trade talks are progressing, economists cautioned that the lack of details had left much in doubt, including what criteria Beijing will use to evaluate the application for exporting rare earth magnets.

“It underscores how tough and detailed trade talks can be,” said Wendy Cutler, vice president at Asia Society Policy Institute, with the latest development signaling both sides are working to ensure the preliminary deal agreed upon in Geneva gets implemented “in good faith.”

In a separate statement over the weekend, the commerce ministry reiterated its opposition against other countries seeking tariff relief with the U.S. in any deal that would compromise China’s interests. “If such a situation occurs, China will not accept it and will take resolute countermeasures to safeguard its legitimate rights and interests,” the statement said.

A private survey on China’s manufacturing activity conducted by Caixin Media and S&P Global is due on Tuesday, which is expected to improve slightly to 49 in June from 48.3 in the previous month, according to a Reuters poll.

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