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BEIJING — China’s manufacturing sector contracted for the third consecutive month in June, raising fresh concerns about the country’s fragile economic recovery despite ongoing government stimulus measures.

The official Purchasing Managers’ Index (PMI), published by the National Bureau of Statistics (NBS), inched up to 49.7 in June from 49.5 in May. While the figure marked a slight improvement, it remained below the neutral 50 mark, which separates expansion from contraction. The result matched the median forecast from a Reuters poll of economists.

Manufacturing Sector: Subtle Gains, Persistent Struggles

Although some areas of industrial production showed resilience, others highlighted underlying weakness:

• Production Sub-Index: Improved to 51, indicating a modest expansion in output.
• New Orders: Rose to 50.2, suggesting demand is picking up, albeit cautiously.
• Export Orders: Rebounded to 47.5 from 44.7, likely supported by easing trade tensions following a mid-May U.S.–China trade truce.
• Employment and Inventory: Remained under pressure, with factory staffing at 47.9 and inventory levels at 48, both in contraction territory.

The sustained contraction signals that manufacturers are still dealing with a toxic mix of overcapacity, price competition, and subdued domestic and global demand.

Chinese factories have also been battered by a deflationary environment. Consumer prices dropped 0.1% year-on-year in May, while producer prices plunged by their sharpest margin since July 2023. Profits for industrial firms fell 9.1% in May, the steepest decline in seven months, reflecting the profit erosion across manufacturing and energy-intensive industries.

Non-Manufacturing and Construction Show Slight Gains

There was better news in the broader economy. The non-manufacturing PMI, which includes services and construction, edged up to 50.5 from 50.3 in May.

• Construction Index: Jumped to 52.8, boosted by ongoing infrastructure projects.
• Services Index: Slipped slightly to 50.1, showing the sector remains weak despite gradual reopening and seasonal consumption drivers.

“The economy regained some momentum in June,” said Zichun Huang, China economist at Capital Economics. “But growth in the second half of 2025 may soften due to weaker exports and diminishing fiscal support.”

Markets and Investors Respond Cautiously

The CSI 300 index of mainland China’s largest companies ticked up 0.22% following the release of PMI data, reflecting modest investor optimism. However, gains remain fragile as traders weigh mixed economic signals and ongoing trade risks.

A separate private manufacturing survey by Caixin Media and S&P Global, which focuses more on small and mid-sized exporters, is scheduled for release Tuesday. According to Reuters, analysts expect that index to rise to 49.0 in June from 48.3 in May, still signaling contraction.

Trade Developments Add to Uncertainty

The manufacturing slowdown is taking place against a backdrop of evolving U.S.–China trade dynamics. In May, China’s exports to the U.S. dropped 34.5% year-on-year, following a 21% decline in April, as higher U.S. tariffs forced Chinese exporters to diversify to alternative markets.

On Friday, China’s Commerce Ministry confirmed that Beijing and Washington had reached a preliminary agreement on key aspects of their existing trade framework. As part of the deal, China pledged to review applications to export controlled items like rare earth magnets, while the U.S. agreed to roll back certain restrictions. However, experts say much remains uncertain.

“This development signals forward movement,” said Wendy Cutler, vice president at the Asia Society Policy Institute, “but the lack of clarity on approval criteria for tech exports highlights just how complex these negotiations remain.”

In a separate statement over the weekend, China’s Commerce Ministry reiterated its firm stance: any U.S. deals that compromise Chinese interests would provoke “resolute countermeasures.”

Beijing's Policy Options Narrowing

In response to the downturn, Chinese Premier Li Qiang emphasized the importance of domestic demand during a recent economic forum in Tianjin, labeling it the key to turning China into a “consumption powerhouse.”

Economists say further fiscal stimulus will be crucial. “We’ll likely see more consumer voucher programs, electronics trade-in incentives, and targeted debt issuance in the second half,” said Tommy Xie, Head of Greater China Research at OCBC Bank, speaking on CNBC.

Outlook: Recovery Still on Shaky Ground

Despite modest improvements in June’s PMI, the road ahead remains bumpy for the world’s second-largest economy. Continued price deflation, slowing global demand, and volatile trade relations are likely to weigh heavily on China’s growth in the coming quarters.

Unless Beijing takes bolder steps to stimulate consumption and support private enterprise, analysts warn the economy could slip further into stagnation.