China's factory activity stalled in May, according to an official survey released Sunday, raising questions about the resilience of the world's second-largest economy amid the ongoing Iran war and tepid demand.
The official manufacturing purchasing managers index (PMI) moderated to 50 in May, down from 50.3 in April, the National Bureau of Statistics reported. A PMI reading above 50 indicates expansion, while below 50 signals contraction.
Key Sub-Indices Decline
The new orders sub-index dropped to 49.9 from 50.6 in April, falling into contraction territory. The production sub-index edged down to 51.2 from 51.5, while the raw material stockpiles sub-index fell to 48.6 from 49.3.
Energy Crisis Impact
China has been less affected by the global energy shock from the Iran war than many other countries, which face inflationary pressures as oil prices have surged due to the closure of the Strait of Hormuz, through which a fifth of the world's oil is shipped in peacetime.
Analysts say China's ample oil reserves and diversified energy sources have helped it weather the war nearly unscathed. "Though the energy crisis remains the dominant headwind for Asia, China is relatively more shielded given its robust energy security set-up," Frederic Neumann, Chief Asia Economist at HSBC, wrote in a research note last week.
Export Performance
Exports remain key for China's broader economy, HSBC said. While exports to the United States have dropped year-on-year for most months in the past year, global exports have been robust, particularly to Europe and Southeast Asia.
Hopes for a recovery in exports to the U.S. have risen following President Donald Trump's summit with Chinese leader Xi Jinping in Beijing in mid-May, and after the two countries agreed to set up separate boards of trade and investment.
Autos, technology, and artificial intelligence-related exports have been driving growth, but some economists point to concerns over the broader economy. Domestic demand remains sluggish in the wake of a years-long property sector slump that has clobbered consumer confidence and investment.
"Domestic demand is lagging, but high-end manufacturing and exports are holding the line," Robin Xing, Chief China Economist at Morgan Stanley, wrote in a research note last week.
Growth Target
Chinese leaders have set an annual economic growth target of 4.5% to 5% for this year, the lowest since 1991, albeit only slightly lower than the "around 5%" target set in 2025. Morgan Stanley said China will still likely meet its 2026 target, but oil prices and easing uncertainties around global oil supplies would be key factors determining the outlook.
