China PMI returns to 50.3 as AI exports offset property slump

China's manufacturing PMI rose to 50.3 in June from 50.0 in May, beating the 50.0 consensus forecast, as surging demand for semiconductors and AI-related equipment offset persistent weakness in property and domestic consumption.

"Exports to meet international demand for chips and other AI-related products, as well as front-loading to get ahead of new US Section 301 tariffs due late July, underpinned the improvement," said Dan Wang, China director at consultancy Eurasia Group.

The new orders index jumped 1.3 points to 51.2, returning to expansion after May's borderline reading, while the new export orders sub-index rose 1.5 points to 50.1 — its first time above 50 since April. The production index edged up 0.2 points to 51.4. Input prices fell sharply to 54.2 from 60.5 in May, easing cost pressures, though factory gate prices slipped back into contraction at 48.2 from 51.9.

The data suggest global AI investment is providing a critical cushion for manufacturers in China's $20 trillion economy, even as a prolonged property slump and subdued household spending weigh on broader growth. With second-quarter GDP expected to slow to around 4.6% year-on-year, according to ING, the sustainability of the recovery hinges on whether domestic demand can regain momentum once tariff-driven front-loading fades.

Demand recovery narrows the supply-demand gap

The most significant shift in June was the narrowing of the gap between production and demand. In May, the production index exceeded the new orders index by 1.3 points, signaling supply outstripping demand. That gap shrank to just 0.2 points in June, as new orders recovered faster than output. The procurement volume index rose 1.6 points to 51.4, suggesting businesses are restocking in response to order improvements.

The demand pickup was concentrated in specific sectors. High-tech manufacturing PMI rose 0.6 points to 53.5, well above the headline reading, with computer, communication and electronic equipment, as well as special-purpose equipment, reporting both production and new orders above 54.0. Equipment manufacturing and consumer goods PMIs also strengthened, rising to 52.5 and 50.2 respectively. In contrast, high-energy-consuming industries remained in contraction at 47.1, unchanged from May.

The National Development and Reform Commission and the Ministry of Finance allocated a third batch of 625 billion yuan ($86 billion) in ultra-long-term special treasury bonds for consumer goods trade-in programs, which helped stabilize inventory expectations among retailers and manufacturers.

Small businesses and construction remain weak

Despite the headline improvement, the recovery remained uneven. Medium-sized enterprise PMI surged 1.9 points to 50.5, returning to expansion for the first time since March, a positive sign that demand recovery is broadening. However, large enterprise PMI slipped 0.4 points to 50.7, and small enterprise PMI fell 0.3 points to 48.2, remaining in contraction for a third consecutive month.

The construction sector continued to struggle. Its business activity index edged up 0.2 points to 49.0, still below the 50 threshold for a second month, reflecting the ongoing drag from the property downturn. New orders for construction stood at 46.3, though this was a 2.8-point improvement from May. Employment in the sector remained deeply depressed at 42.3, despite a 0.9-point month-on-month gain.

The services sector fared slightly better, with its business activity index at 50.4, supported by telecommunications, internet software, financial services and insurance — all above 55.0. Air transport and real estate services remained below 50. Services business activity expectations rose 0.6 points to 56.0, indicating cautious optimism among service providers.

Price pressures ease but deflation risks linger

Input cost pressures moderated significantly in June. The purchasing price index fell 6.3 points to 54.2, retreating from May's elevated level of 60.5, as global commodity prices stabilized and logistics costs from Middle East disruptions eased. However, factory gate prices fell back below 50 to 48.2, suggesting manufacturers still lack pricing power in a weak demand environment.

"Despite the improvement in activity, the manufacturing sector appears to be slipping back into deflation," said Julian Evans-Pritchard, head of China Economics at Capital Economics. The divergence between falling input costs and declining output prices means margin improvement will depend on sustained order growth rather than cost relief alone.

Inventories remained cautious. Raw material inventories edged down 0.2 points to 48.4, while finished goods inventories fell 1.6 points to 47.7, indicating that businesses are still destocking rather than actively rebuilding inventory. The procurement increase was largely order-driven rather than signaling a broad restocking cycle.

Outlook hinges on domestic demand

The composite PMI output index, combining manufacturing and non-manufacturing, rose 0.1 points to 50.6, confirming a modest acceleration in overall business activity. Manufacturing production expectations rose 0.4 points to 54.3, with special-purpose equipment, railway and aerospace equipment, and electrical machinery all above 57.0.

"The export strength is set to continue, driven by global AI investment demand," said Xu Tianchen, senior economist at the Economist Intelligence Unit. "Fiscal spending has lagged behind budget arrangements, and it should accelerate in the coming months. There is also room for monetary easing."

China has set a 2026 growth target of 4.5% to 5.0%, slightly below last year's 5 percent expansion. With retail sales falling for the first time in over three years in May and new home prices continuing to decline, policymakers face the challenge of managing a two-speed economy — booming AI-related exports alongside a sluggish domestic sector.

The next key data point will be second-quarter GDP, due in mid-July, which will show whether the economy gained enough momentum in June to offset a weak April and May.

This article is for informational purposes only and does not constitute investment advice.