China's industrial output is poised to edge back into growth territory this month, though likely at the narrowest of margins. The world's second-largest economy continues to navigate a challenging landscape where strong external demand for high-tech goods, fueled by the global artificial intelligence boom, is counterbalanced by persistent domestic weakness. According to a Reuters poll of 23 economists, the official purchasing managers' index (PMI) is forecast to rise to 50.1 from May's 50.0. This reading would sit just above the 50-point threshold that demarcates expansion from contraction, with the data scheduled for release on Tuesday.
The surge in global AI investment has played a crucial role in shielding the world's top manufacturer from export declines that many analysts had anticipated amid ongoing turmoil in the Middle East. Nevertheless, indicators suggest that the stockpiling behavior linked to rising energy costs is diminishing. As prices climb, international buyers are beginning to draw down their inventories, reducing the external demand support that has propped up recent trade figures.
Domestic demand remains stagnant, underscoring the fragile nature of the current recovery. The Economist Intelligence Unit provided the most bullish forecast in the poll, projecting a PMI reading of 50.4. In contrast, Moody's Analytics offered the most conservative estimate at 49.7. Xu Tianchen, a senior economist at the Economist Intelligence Unit, noted that trade frontloading was evident in June. Exporters accelerated shipments in response to uncertainty surrounding U.S. trade policy, with late July serving as a critical juncture when new U.S. Section 301 tariffs are set to take effect.
Separing industrial profits data released over the weekend highlights a divergence in economic performance across different sectors. Upstream industries and firms within the computer sector recorded significant profit increases. However, downstream manufacturers continue to face intense pressure, weighed down by a prolonged property crisis that is dampening consumer spending across the $20 trillion economy.
Compounding the domestic challenge, China's central bank has instructed certain commercial banks to increase lending this month, according to people familiar with the matter. This directive underscores the persistent weakness in credit demand as the economy grapples with sluggish consumption. Strong export performance helped the economy surpass forecasts in the first quarter, but recent indicators suggest that growth is becoming increasingly dependent on chips and semiconductors. Latest trade statistics reveal that shipments of automated data processing equipment surged more than 60% in value terms year-on-year, whereas exports of other goods, such as furniture, rose by a mere 1.9%.
The domestic consumption picture is equally concerning. Retail sales for May fell for the first time in over three years, according to the latest available data. This decline coincided with a faster slump in new home prices. The private sector RatingDog factory activity survey is anticipated to drop to 51.6 from 51.8, with that data due on Wednesday. The data underscores the broader macroeconomic forces at play, including central bank policy shifts and the structural realignment of export markets.