China factory activity tops expectations in April — but growth slows as new orders soften

China’s economic landscape presents a complex picture, with recent data revealing a divergence between the industrial and service sectors. While manufacturing activity unexpectedly edged higher in April, the non-manufacturing sector contracted, signaling potential headwinds for domestic demand. This comes as the nation prepares for a high-stakes summit with the United States, where trade policies are expected to be a central focus.

The official manufacturing purchasing managers’ index (PMI) registered 50.3 in April, exceeding expectations of 50.1. A figure above 50 indicates expansion. This suggests continued resilience in the industrial sector, despite a slowdown in new orders. However, the non-manufacturing PMI fell to 49.4, indicating a contraction in both the services and construction sectors. China’s composite PMI also dipped to 50.1, reflecting the overall softening in economic activity.

Hao Zhou, head of research and chief economist at Guotai Junan International Holdings, noted that while industry remains comparatively firm, weakness in services and domestic demand keeps boosting internal demand as a policy priority. He also highlighted that output and new orders continue to support expansion, despite the slowdown in new order growth.

The economic data arrives as China anticipates a meeting between President Xi Jinping and U.S. President Donald Trump in May. Beijing is likely seeking clarity regarding the potential re-imposition of Section 301 tariffs. Trump previously enacted a 10% global tariff on imports to the U.S. After a Supreme Court decision struck down his earlier Liberation Day tariffs.

Past engagements between the two leaders, such as the meeting in Busan, South Korea in 2023, have yielded temporary truces. That agreement saw the U.S. Reduce overall tariffs on Chinese goods to around 47%, while Beijing pledged to suspend sweeping export controls on rare earths.

The economic context is particularly relevant to companies like Shein, the fast-fashion e-commerce giant heavily reliant on manufacturing in Guangzhou, China. The region is known as “Shein Village,” a concentration of factories powering the retailer’s global operations. The potential for increased tariffs and ongoing trade tensions could significantly impact Shein’s supply chain and profitability.

Did you know? Guangzhou is a major industrial hub, attracting rural workers seeking higher incomes. However, reports indicate that workers in Shein’s supply chain often work long hours, exceeding Chinese labor law limits.

The situation highlights the fragility of global supply chains and the potential for disruption due to geopolitical factors. Companies reliant on Chinese manufacturing face increasing pressure to diversify their sourcing and build more resilient supply networks. The combination of trade uncertainties and domestic economic challenges within China could lead to further shifts in global manufacturing patterns.

Pro Tip: Businesses should proactively assess their exposure to potential tariff increases and explore alternative sourcing options to mitigate risk.

Q: What does the PMI data tell us about China’s economy?

A: The PMI data indicates a mixed economic picture, with manufacturing holding steady but the service sector contracting.

Q: What is Section 301 and why is it important?

A: Section 301 refers to a U.S. Trade law that allows the president to impose tariffs on goods from countries deemed to be engaging in unfair trade practices.

Q: How could tariffs impact companies like Shein?

A: Increased tariffs could raise the cost of goods for Shein, potentially impacting its profitability and competitiveness.

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