China’s Factory Activity Plummets Amid U.S. Tariff Pressures – Reuters

China's manufacturing sector experienced a sharp contraction in April, marking the fastest decline in factory activity in 16 months, according to a survey released by the National Bureau of Statistics (NBS) on Wednesday. The official Purchasing Managers' Index (PMI) dropped to 49.0, down from 50.5 in March, falling below the 50-point threshold that separates growth from contraction and missing economists' expectations of 49.8.

The downturn, attributed largely to U.S. President Donald Trump's "Liberation Day" tariff package, has abruptly halted two months of recovery in China's manufacturing sector. The tariffs, which include levies as high as 145% on Chinese imports, have disrupted export strategies and intensified economic pressures on the world's second-largest economy.

Tariff Impact and Economic Challenges

The imposition of steep U.S. tariffs has forced Chinese manufacturers to grapple with weakened external demand. Many factories had been front-loading shipments to circumvent the anticipated duties, but the arrival of the levies has curtailed this approach. "The sharp drop in the PMIs likely overstates the impact of tariffs due to negative sentiment effects, but it still suggests that China’s economy is coming under pressure as external demand cools," said Zichun Huang, China Economist at Capital Economics.

Adding to the strain, domestic demand remains subdued, with factory owners struggling to find alternative overseas buyers. The Caixin/S&P Global manufacturing PMI, a private-sector survey focused on smaller, export-oriented firms, also reflected the slowdown, slipping to 50.4 from 51.2 in March, though it outperformed expectations. The survey highlighted a sharp decline in new export orders, the steepest since July 2023, and a resumption of employment declines.

Broader Economic Implications

The non-manufacturing PMI, covering services and construction, also weakened, falling to 50.4 from 50.8, though it remained in expansion territory. The composite PMI, combining manufacturing and non-manufacturing activity, dropped to 50.2 from 51.4, signaling a broader economic slowdown.

Analysts warn that the intensifying U.S.-China trade war, coupled with domestic challenges such as a prolonged property crisis and sluggish income growth, could hinder China's ability to meet its economic growth targets. The International Monetary Fund, Goldman Sachs, and UBS have recently downgraded their 2025 growth forecasts for China, with none expecting the economy to achieve Beijing's official target. Capital Economics projects a modest 3.5% expansion for the year, underscoring the need for more robust fiscal support.

Policy Response and Future Outlook

Despite the mounting pressures, Beijing has so far refrained from announcing significant new stimulus measures, adopting a cautious approach in anticipation of a prolonged trade conflict. "The ripple effects of the ongoing China-U.S. tariff standoff will gradually be felt in the second and third quarters," said Wang Zhe, economist at Caixin Insight Group. "Policymakers should be well-prepared, with action taken sooner rather than later."

The manufacturing sector's struggles have also raised concerns about employment, with estimates circulating on platforms like X suggesting potential job losses ranging from 10 to 19 million out of China's 750 million workforce. While these figures remain unverified, they reflect growing public unease about the economic fallout.

As global trade tensions persist, Chinese officials face the daunting task of rebalancing the economy while navigating an increasingly volatile international landscape. Investors and policymakers alike are closely watching for signals of additional government support, which could determine the trajectory of China's economic recovery in the months ahead.