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China PMIs Slide as U.S. Tariff Risks and Weak Demand Cloud Economic Outlook

By:
Bob Mason
Updated: Jul 31, 2025, 10:49 GMT+00:00

Key Points:

  • China’s July NBS Manufacturing PMI fell to 49.3, indicating deeper contraction in the sector amid trade headwinds.
  • Overseas demand weakened ahead of new U.S. tariffs on transshipments via Vietnam and Indonesia.
  • Policymakers outlined fiscal and monetary measures to drive consumption and stabilize export conditions.
China

China PMI Miss Fuels Fears Over Trade and Stimulus Lag

China’s manufacturing sector was under the spotlight this morning as economists continued to assess the potential impact of a no-deal on external demand and the broader economy.

The NBS Manufacturing PMI fell from 49.7 in June to 49.3 in July, signaling a mildly sharper contraction across the sector. Meanwhile, the NBS Non-Manufacturing PMI dropped to 50.1 in July, down from 50.5 in June.

External Demand and Trade Pressures Mount

Markets closely watched manufacturing data amid escalating trade tensions. Notably, external demand and overseas orders declined further in July.

The new order index fell from 50.2 to 49.8, while the new export order index declined 1.2 percentage points to 47.1.

Alarmingly, the pullback in external demand came ahead of the US imposing a 40% tariff on transshipments from Vietnam and a 19% tariff on Indonesia, two of China’s potential trading routes to the US.

South East Asia and EU Trade Developments

US trade deals with Southeast Asian countries and the EU could dampen demand for Chinese goods despite China’s oversupply-underprice policy.

Chinese exports to Southeast Asia rose 16.8% year-on-year in June, while direct shipments to the US dropped 16.1%. Given the tariff hikes on Southeast Asian countries, China’s trade terms with Vietnam and Indonesia, in particular, could deteriorate significantly.

Looking further west, Chinese exports to the EU also jumped in June, rising 6.9% YoY, up from 3% in May. Notably, shipments to Germany and France increased 11.9% and 8.6%, respectively. The US-EU trade deal may force European manufacturers to target regional demand and potentially boost exports bound for Asia. Lower prices for Chinese goods may bolster demand from the EU but continue to erode profits.

Expert Commentary on Trade and Competition

Daniel Kral, a Europe macro specialist, remarked:

“China has been grabbing export market share from advanced economies in general with the Eurozone being the most severely impacted. Reflects direct competition across increasingly more advanced manufactured goods products and China’s generous state support that Europe can’t match.”

China exports and industrial production dominate
Oxford Economics – Export Growth

Alicia Garcia Herrero, Asia Pacific Chief Economist at Natixis, underscored China’s threat to the EU economy, stating:

“The EU views China as both a security and economic threat, even if it doesn’t openly say so, and that trade relations between China and the bloc are in a vicious circle that harms both sides. Europe is not getting enough out of the summits, as key issues like overcapacity and export controls remain unresolved.”

Domestic Economic Pressures and Stimulus Needs

Given the potential of US trade policy to fuel protectionism, Beijing may need to deliver meaningful stimulus measures to fuel private consumption. Robust exports contributed to China’s 5.2% year-on-year GDP growth in the second quarter, marginally softer than the first quarter’s 5.4%, but above Beijing’s 5% GDP growth target.

While Q2 growth exceeded expectations, domestic challenges persist. Weak consumer demand continues to pressure producer prices, which declined 3.6% YoY in June, following a 3.3% fall in May. Policy measures aimed at lifting domestic demand could curb ongoing price wars, improve labor market conditions, and bolster consumer sentiment, key to driving consumer spending.

CPC Politburo Policy Announcements

On July 30, the CPC Politburo convened. According to CN Wire, lawmakers announced plans to:

  • Implement more proactive fiscal policy and moderately loose monetary policy to maximize policy impact.
  • Optimize export tax rebate policy.
  • Deepen targeted measures to boost consumption, expand goods spending, and foster new growth in services.
  • Regulate disorderly competition; advance capacity management in key industries.
  • Monetary policy should maintain ample liquidity and help lower overall social financing costs.

Xi Jinping will also chair a fourth plenary session of the 20th Central Committee. Lawmakers will reportedly review the economic situation and policy priorities. Considering a potentially sharp drop in Chinese exports, policy measures to boost domestic consumption and tackle price wars may be crucial for Beijing to achieve its GDP growth target.

PMI Numbers Overshadow Beijing Policy Plans

Mainland China markets reacted to the weaker PMI numbers, which overshadowed the policy updates from Beijing. The CSI 300 and the Shanghai Composite Index dropped 0.60% and 0.48%, respectively, in early trading on Thursday, July 31. Nevertheless, the CSI 300 is up 4.85% in July-to-date, with the Shanghai Composite Index gaining 4.49%, outperforming the Nasdaq Composite Index (+3.73%).

The Hang Seng Index also retreated in early trading on Thursday, sliding 1.21%, but remained up 3.33% month-to-date.

CSI 300 falls on weak PMIs but continues to outperform the Nasdaq
CSI 300 – NASDAQ – Daily Chart – 310725

Outlook

US-China trade developments, China’s upcoming private sector PMIs (August 4), and Beijing’s stimulus moves will continue to drive market trends. Effective stimulus and tangible progress on trade could support demand for Hong Kong and Mainland-listed stocks. On the other hand, rising US-China trade tensions or an absence of consumption-focused stimulus from Beijing may weigh on risk appetite.

Track our real-time updates on China trade policy and equity market trends, and consult our economic calendar.

About the Author

Bob Masonauthor

With over 28 years of experience in the financial industry, Bob has worked with various global rating agencies and multinational banks. Currently he is covering currencies, commodities, alternative asset classes and global equities, focusing mostly on European and Asian markets.

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