China’s Manufacturing Rebounds in June, but External Demand and Job Cuts Cloud Outlook

Summary:

China’s manufacturing sector returned to growth in June with a Caixin PMI of 50.4, driven by new orders and stronger production. However, employment fell and export demand remained weak...

Manufacturing Returns to Expansion but Recovery Remains Fragile

China’s private manufacturing activity edged back into expansion in June 2025, reflecting a modest rebound in domestic demand. The Caixin/S&P Global Manufacturing Purchasing Managers’ Index (PMI) rose to 50.4, a significant jump from May’s 48.3, and above the neutral 50-point mark that separates growth from contraction. This figure also exceeded market expectations and marked the sector’s first expansion in several months.

However, the rebound was uneven. While the increase in new domestic orders helped boost production, international demand continued to falter. The Caixin findings contrasted with the official manufacturing PMI released earlier, which reported contraction for the third consecutive month, highlighting a divergence between large state-owned and smaller private-sector firms.

Rising Domestic Orders Spur Output

June’s growth was primarily driven by a recovery in domestic demand. New orders rose for the first time since April, fueled by improving trade conditions and targeted promotional efforts by firms. This uptick translated into the strongest output levels since November 2024. The causal link between increased new orders and output expansion is clear—businesses responded directly to higher sales volumes by ramping up production.

The rise in demand also led to an accumulation of backlogged orders for the first time in three months, due to a simultaneous drop in workforce capacity. While this typically indicates healthy utilization of resources, the root cause—employment reductions—reveals deeper structural weaknesses.

Labor Market Pressure Signals Caution

Despite stronger activity, employment in China’s manufacturing sector declined again in June. Respondents attributed this to both voluntary resignations and layoffs, with many smaller exporters under pressure to cut wages or jobs to remain competitive. This signals a more troubling trend: while output is improving in the short term, job creation is not following suit, implying a decoupling between production growth and labor absorption—a worrying sign for long-term recovery sustainability.

This development suggests a correlation rather than causation between output gains and employment dynamics. The short-term production rise has not translated into job stability, hinting at companies' reluctance to commit to labor expansion amid fragile margins.

Deflationary Pressures Despite Rising Logistics Costs

Output prices fell at the sharpest rate since January, reflecting weak pricing power among manufacturers. This decline was supported by falling input costs, but export-related charges continued to rise due to more expensive logistics and shipping. The imbalance between falling domestic prices and higher export logistics costs underlines margin compression in the sector, especially for export-dependent businesses.

This divergence has resulted in uneven profitability. Some firms reported having to sell at a loss, a clear indicator of external challenges still facing the sector. In this case, causality is apparent: rising logistics expenses are directly pushing up export charges, while domestic price weakness stems from insufficient demand and strong competition.

Muted Business Confidence and Policy Outlook

Although the June PMI offered a glimmer of recovery, overall business confidence slipped from May and remained below the historical average. Companies remain cautious, with ongoing global uncertainties and unresolved domestic demand imbalances clouding the outlook.

Goldman Sachs analysts noted that the upcoming July Politburo meeting is unlikely to introduce major new stimulus measures, as Beijing appears moderately content with current macroeconomic performance. This suggests that significant government intervention is not imminent, even as key indicators such as employment and external demand remain under pressure.

Positive Signs in Trade Talks, But Limited Immediate Impact

On the trade front, recent developments offered limited relief. The United States and China reached an agreement over rare earth mineral shipments, continuing diplomatic progress initiated in May. While this may help ease some sector-specific bottlenecks, it does not directly impact broader manufacturing sentiment or export orders in the near term.

China’s return to manufacturing growth in June points to early signs of stabilization in the industrial sector. However, the improvement is largely driven by short-term domestic factors, while underlying challenges—particularly weak employment, soft export demand, and limited pricing power—persist. Without stronger policy support or a rebound in global demand, this recovery remains vulnerable to setbacks, and long-term momentum will depend on resolving deeper structural issues.

Source: Reuters

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