China: Activity Likely to Stay Firm in May on Tariff Reversal – Standard Chartered

Factory and Export Activity Rebound on Tariff Truce

Economic analysts at Standard Chartered report that China's economic activity likely remained solid in May, supported by the mid-month US-China tariff truce and positive momentum in industrial production and trade.

The official Manufacturing PMI rose to 49.5 in May, up from 49.0 in April, reflecting month-on-month gains in factory activity. Sub-indices for new orders and export orders also improved, though they remain in contractionary territory. The production component of the PMI advanced to 50.7, signaling month-over-month expansion.

“The rebound in manufacturing suggests that tariff easing has already started showing effects,” Standard Chartered analysts stated.

Export and Investment Trends Support Broader Growth

Despite a high base in prior year comparisons, China's export growth is firming on a two-year compound annual growth rate (CAGR) basis, helped by recovering US trade flows. Imports also appear to have resumed growth.

Meanwhile, industrial production (IP) is estimated to have expanded by 6.4% year-over-year in May. Retail sales likely benefited from seasonal spending and government trade-in programs for consumer durables.

On the investment side:

• Fixed Asset Investment (FAI) is seen as stabilizing, thanks to robust infrastructure activity.
• Real estate investment remains weak, continuing a downward trend due to housing market softness.

Deflation Pressures Persist Despite Monetary Easing

The report also warns of intensified deflationary pressures, despite ongoing monetary easing by Chinese policymakers. This easing is likely to continue supporting money and credit growth, helping counter weaker pricing power in core sectors.

Services and Construction Lag Behind

While the services sector remains in expansion, growth is subdued, and construction activity has slowed, weighed down by weakness in the property sector.

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