China's factory activity flatlined in May following two months of expansion, official data showed Sunday, as weaker demand and soaring energy costs due to the war in the Middle East weighed on growth and output.
The manufacturing purchasing manager's index (PMI) – a key measure of industrial activity – was 50.0 in May, according to the National Bureau of Statistics (NBS).
The 50.0 mark separates expansion from contraction. Economists surveyed by Bloomberg had predicted a reading of 50.0 as well.
The figure slipped from 50.3 in April and 50.4 in March.
The new orders sub-index dropped to 49.9 from 50.6 in April, while the sub-index on production edged down to 51.2 from April’s 51.5. The sub-index for raw material stockpiles fell to 48.6 from 49.3 in April.
China has been less affected by the global energy shock from the Iran war than many other countries, which face inflationary pressures as oil prices have surged due to the closure of the Strait of Hormuz, through which a fifth of the world's oil is shipped in peacetime.
Analysts say China's ample oil reserves and diversified sources of energy have helped the world's second-largest economy weather the war nearly unscathed.
However, Chinese factories are facing higher costs with the prices of raw materials rising, particularly in the energy and chemical sectors.
Both supply and demand in industries including petroleum, rubber and plastics showed "continued weakness," said NBS statistician Huo Lihui.
Meanwhile, exports remain crucial for China’s broader economy, according to banking giant HSBC.
While China’s exports to the U.S. have dropped on an annual basis during most months in the past year, its global exports have been robust, particularly to Europe and Southeast Asia.
Hopes for a recovery in exports to the U.S. have risen following President Donald Trump’s summit with Chinese leader Xi Jinping in Beijing in mid-May, and after the two countries agreed to set up separate boards of trade and investment.
Autos, technology and artificial intelligence-related exports have been helping to drive export growth, but some economists also point to concerns over the broader economy. Domestic demand remains sluggish in the wake of a years-long property sector slump that has clobbered consumer confidence and investment.
"Domestic demand is lagging, but high-end manufacturing and exports are holding the line,” Robin Xing, Chief China Economist at Morgan Stanley, wrote in a research note last week.
Chinese leaders have set an annual economic growth target of 4.5% to 5% for this year. That's the lowest target since 1991, albeit only slightly lower than the "around 5%" target set in 2025.
Morgan Stanley said China will still likely meet its 2026 target, but oil prices and the easing of uncertainties around global oil supplies would be key factors determining where things might be heading.
