In April 2023, China’s factory activity experienced a significant contraction, reaching its lowest level in 16 months, largely attributed to the implementation of steep tariffs imposed by the United States. This situation has compelled the Chinese government to expedite its economic stimulus initiatives. The manufacturing Purchasing Managers’ Index (PMI) fell to 49.0, according to the National Bureau of Statistics (NBS), marking the first time the index dipped below the neutral threshold of 50 since December 2023. Such a decrease indicates a decline in manufacturing activity, raising concerns about the overall health of the economy.
Zhao Qinghe, a senior analyst at the NBS, provided insights into the reasons behind this contraction, citing “sharp changes in the external environment and other factors.” The data illustrates the adverse effects US President Donald Trump’s tariffs, particularly a staggering 145% on Chinese goods, have had on China’s export-driven economic framework. These tariffs have begun to take a toll on Chinese manufacturers, resulting in order cancellations and production slowdowns, heightening fears regarding the nation’s economic growth potential.
This decline in manufacturing is a notable setback for Beijing, which has been striving to uphold a stance of confidence amid the ongoing trade war. The challenges faced by the Chinese economy have been exacerbated by already weakening domestic consumption and an ongoing real estate crisis. While the non-manufacturing PMI indicated slight growth in the services and construction sectors, hovering at 50.4, the broader economic indicators suggest a troubling downturn. Additionally, a measure of new export orders plummeted to 44.7, marking the lowest point since late 2022, a period during which China was still dealing with the repercussions of the Covid-19 pandemic.
Economist Robin Xing from Morgan Stanley highlighted in a recent report that the decline in the PMI evidences the negative repercussions of the tariffs, which are resulting in diminished external demand. In his analysis, he asserted that the impact of the tariffs will be most pronounced in the current quarter, as numerous exporters have ceased production and shipments to the United States amidst heightened uncertainties surrounding tariffs. Xing emphasized the need for a more proactive policy approach, critiquing the current measures as insufficient to mitigate the shocks caused by the tariffs.
As the economic landscape becomes increasingly concerning, analysts anticipate that the Chinese government will ramp up its fiscal and monetary stimulus efforts in the forthcoming months to stimulate growth. Since late last year, Beijing has initiated several modest measures, including facilitating easier access to credit for struggling enterprises and implementing strategies to enhance domestic consumption. However, officials have refrained from an aggressive nationwide stimulus approach, opting instead for targeted support to ease the burden on exporters while hinting at possible additional measures to be introduced soon.
During a government press conference, Zhao Chenxin, the vice chairman of the National Development and Reform Commission, reassured the public that the government possesses “ample policy reserves” to respond to the economic challenges it faces and will expedite the application of previously announced measures.
In a simultaneous development, Chinese Foreign Minister Wang Yi dismissed suggestions for a negotiated trade truce with the US, arguing that capitulating to American demands would only serve to embolden what he referred to as a US “bully.” His remarks, made during a meeting in Rio de Janeiro, resonated with sentiments echoed in a recent video published by his ministry, urging the international community to confront US leadership.
In an interview that aired shortly after these developments, President Trump expressed that China “deserved” the tariffs instituted, suggesting that Beijing would ultimately absorb the burden of these levies. Trump stated, “China probably will eat those tariffs. But at 145% [tariff], they essentially cannot conduct much business with the United States.” This ongoing saga underscores the escalating tensions between China and the US, and the substantial economic implications these tariffs have for China’s manufacturing sector and broader economic stability.