China's factory activity unexpectedly shrinks in May on tariffs

China’s manufacturing activity shrank in May at its fastest pace since September 2022, as elevated US tariffs weighed on smaller exporters despite a truce reached between Washington and Beijing in Geneva earlier in the month.

The Caixin/S&P Global manufacturing purchasing managers’ index came in at 48.3 points in May, compared with 50.4 points in April. However, it was expected to reach 50.7 points.

The divergence between the official and Caixin PMI readings may be in part driven by the surveys’ timing differences, economists at Goldman Sachs said in a note Tuesday.

“Uncertainty in the external trade environment has increased, adding to domestic economic headwinds,” said Wang Zhe, senior economist at Caixin Insight Group, adding that “major macroeconomic indicators showed a marked weakening at the start of the second quarter.”

The decline in foreign demand accelerated in May, with the gauge for new export orders falling to its lowest level since July 2023, Caixin said. Total new orders, an indicator of overall demand, also contracted for the first time in eight months.