China’s factory activity contracts for a second month

China’s manufacturing activity contracted for the second consecutive month in February, underscoring persistent challenges in the world’s second-largest economy despite potential relief on the horizon from improving U.S. trade relations.

The National Bureau of Statistics reported Wednesday that the official manufacturing purchasing managers index (PMI) fell to 49 in February from 49.3 in January, reaching a four-month low. A reading below 50 indicates contraction in the manufacturing sector.

This downturn follows a brief recovery in December, when the manufacturing PMI registered 50.1, ending an eight-month stretch of contraction. The return to negative territory highlights the fragility of China’s industrial sector, which continues to struggle amid weak domestic demand.

Huo Lihui, a chief statistician at the National Bureau of Statistics, attributed the February decline partly to seasonal factors, particularly the nine-day Lunar New Year holiday that fell in mid-February this year. The extended holiday period traditionally slows production as factories close and workers return to their hometowns.

However, a separate private sector survey painted a more optimistic picture. Chinese credit research firm RatingDog reported a February PMI reading of 52.1, up from 50.3 in January, marking the sharpest expansion since December 2020. This discrepancy isn’t unusual, as private surveys typically better reflect conditions among smaller, export-focused private companies compared to the official data, which gives more weight to larger state-owned enterprises.

“The mixed bag of manufacturing PMI data suggests a similar trajectory to what we observed in 2023,” noted Lynn Song, chief economist for Greater China at ING Bank. “Resilient external demand is continuing to drive growth, while domestic demand has been disappointingly soft.”

Yao Yu, founder of RatingDog, highlighted a significant rebound in overseas demand in February, with new export orders showing notable growth. This uptick in foreign orders could provide vital support for Chinese manufacturers amid continuing domestic economic challenges.

The manufacturing sector may soon receive additional support from improving U.S.-China trade relations. A recent U.S. Supreme Court ruling against reciprocal tariffs has resulted in reduced U.S. tariffs globally, including those on Chinese goods. Zichun Huang, a China economist at Capital Economics, suggested this development could provide a “small boost” to Chinese exports and manufacturing activity in the coming months.

Further relief may come from U.S. President Donald Trump’s planned meeting with Chinese leader Xi Jinping in April, which could potentially lead to an extended trade truce between the world’s two largest economies. Any de-escalation in trade tensions would be welcome news for Chinese manufacturers who have faced significant headwinds from tariffs and trade restrictions in recent years.

Despite these potential tailwinds from international trade, China’s persistent domestic demand weakness remains a significant concern. The country continues to grapple with a prolonged real estate sector downturn that has dampened both consumption and investment across the economy.

All eyes will now turn to China’s annual national congress, which begins Thursday. During this key political meeting, Beijing is expected to unveil its economic growth target for the year, with most economists anticipating a goal of 4.5% or higher. The week-long congress will also approve China’s five-year policy blueprint for 2026-2030, which is expected to emphasize technological advancement and economic self-reliance.

The manufacturing data comes at a critical moment as Chinese policymakers balance efforts to stimulate growth while addressing structural challenges in the economy. How effectively they navigate these issues will have significant implications not just for China’s economic trajectory but for global supply chains and trading partners worldwide.