China’s Manufacturing Holds Firm—Can It Withstand Trump’s Tariff Blow?
On Monday, February 3, China’s economy was under the spotlight as US President Trump rolled out 10% tariffs on Chinese goods.
The latest Caixin Manufacturing PMI reflected the impact of global trade uncertainties, falling from 50.5 in December to 50.1 in January. Although the PMI remained above the critical 50 mark, indicating modest expansion, the January Survey highlighted several concerns:
- Improving domestic demand contributed to an upswing in new orders, with some manufacturers attributing the increase to stockpiling.
- Conversely, overseas orders declined in January.
- Sentiment across the manufacturing sector improved at the start of 2025. However, business optimism remained below average amid US tariff threats.
- Concerns about the demand outlook impacted the labor market. Employment fell at the fastest pace since February 2020.
- Turning to crucial price trends, input prices stabilized while manufacturers lowered selling prices to boost sales.
- Significantly, selling prices fell for the second consecutive month and at the most marked pace in 18 months.
The January PMI data suggested US tariffs could have a wider impact on China’s economy. Rising unemployment could unravel Beijing’s plans to bolster the economy by rolling out stimulus targeting domestic consumption. Deteriorating labor market conditions could impact wages, consumer sentiment, and spending.
Risks to global demand have intensified after US President Trump announced 10% tariffs on China along with 25% tariffs on Canada and Mexico. While less than the initial threat of 60% tariffs, the 10% levy still raises fears of an impending trade war with China.
Expert Views on China’s Manufacturing Sector
Dr. Wang Zhe, Senior Economist at Caixin Insight Group, commented on the January survey, stating,
“Rising uncertainty in international policies could worsen China’s export environment, posing significant challenges for the economy. In this context, macroeconomic policies must be well-prepared and adjusted promptly to adapt to evolving circumstances. Domestically, weak effective demand and sluggish consumer spending persist, underscoring the need for policies that boost disposable income.”
The Market Reaction to the Caixin Manufacturing PMI
The Hang Seng Index tumbled 2% in response to the US tariff announcement. However, improving domestic demand provided brief support. On Monday, February 3, the Hang Seng Index was down 1.84% to 19,853.
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In the forex market, the AUD/USD reacted adversely to the PMI data, falling from $0.61265 to $0.61021.
On Monday, the AUD/USD was down 1.70% to $0.61021. The slump reflected market concerns over the impact of US tariffs on Chinese demand. Given that China accounts for one-third of Australia’s exports and that Australia’s trade-to-GDP ratio exceeds 50%, fears of trade disruptions weighed heavily on the currency.
Monday’s market reaction to US tariffs and China’s PMI data underscored the need for vigilance. Retaliation to the US tariffs and a full-blown trade war may further pressure the Hang Seng Index and the Aussie dollar.
Discover strategies to navigate this week’s market trends here.