China’s manufacturing sector suffered a significant setback in May 2025, with activity plunging to its lowest level since September 2022. The latest data, published by Caixin and S&P Global, show the Purchasing Managers Index (PMI) fell sharply to 48.3, down from 50.4 in April and well below the neutral threshold of 50 that separates growth from contraction. This marks the first contraction in eight months and the steepest decline in nearly three years.

Tariffs and Weak Demand Drive Downturn

The contraction comes amid mounting external pressures, particularly from stringent U.S. tariffs that have dented export sentiment and exacerbated existing economic headwinds. The index for new export orders dropped to its lowest point since July 2023, signaling a rapid deterioration in foreign demand. Total new orders, a key indicator of overall demand, also shrank for the first time in eight months, with the pace of decline the sharpest since September 2022.

Manufacturing output declined for the first time in 19 months, falling at the fastest rate since November 2022. The employment landscape also worsened, with job losses accelerating and the sector recording its fastest rate of workforce reduction since January. This marks the eighth decline in employment in the past nine months, as manufacturers responded to reduced capacity requirements and falling sales.

Inventory and Price Pressures

Inventories of finished goods accumulated for the first time in four months, a result of declining sales and shipment delays. Meanwhile, both input costs and output charges continued to fall, with the rates of reduction accelerating since April. Lower raw material and energy costs contributed to the drop in input prices, while heightened competition forced firms to pass these savings on to clients.

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The private Caixin PMI reading aligns with official data, which also indicated a second consecutive month of contraction in May, though the official figure showed a slight uptick to 49.5 from April’s 49. Despite the current downturn, some manufacturers expressed cautious optimism that trade conditions may improve and that efforts to expand export markets could help drive future sales.

China’s manufacturing sector now faces mounting pressure to stabilize amid persistent global trade tensions and domestic economic challenges, raising questions about the strength and sustainability of the country’s industrial recovery.

More Trade Talks

Initially, there were only rumors of trade talks between the U.S. and China. For several weeks, markets were declining due to ongoing uncertainty, but China remained steadfast in not giving in to America’s hardball approach to trade. However, that seems to be shifting. 

After a brief meeting between Treasury Secretary Scott Bessent and Chinese officials, the U.S. and China agreed to a tentative pause to work out a trade deal. Trump accused the Chinese of violating that deal recently, which worried many of a potential retaliation. Nothing ever came of it, but the lack of news surrounding new trade talks and deals could have been interpreted as a negative signal.

But that could be turning around. It’s clear there’s a substantial amount of damage being done to the Chinese economy right now. The news of China’s manufacturing decline came out earlier this week, and today it was announced that Xi and Trump held talks yesterday regarding trade. China has maintained a posture of strength and indifference up until now, but the cracks are starting to show. This likely means there’s actually urgency behind the curtains to strike a deal, and if one doesn’t come soon, things could get ugly.