China's factory activity weakens in May
What's the story
China's manufacturing sector hit a snag in May, with the official Purchasing Managers' Index (PMI) slipping to 50 from April's 50.3. The decline is attributed to a long holiday and global demand pressures, indicating that the sector is under some real pressure. A PMI reading below 50 indicates contraction while above 50 indicates expansion.
Sector performance
Non-manufacturing sector sees slight improvement
Despite the slowdown in manufacturing, China's non-manufacturing sector saw a slight improvement. The PMI for construction and services rose to 50.1 from April's 49.4, indicating some growth in these sectors. However, the overall economy is still slowing down, with industrial output and retail sales barely growing in April.
Monetary policy
Central bank cuts interest rates to record low
In light of the economic slowdown, China's central bank has cut interest rates to a record low. The move is part of efforts to stimulate growth amid weak industrial output and retail sales. The government has also announced new measures to improve access for migrant workers to urban services such as education and healthcare, further boosting living standards and consumer spending.
Export resilience
Despite global challenges, Chinese exports remain strong
Despite global challenges, including the Iran war, Chinese exports have remained strong this year. The country recorded a record trade surplus of $1.2 trillion in 2025, and shipping volumes in 2026 have largely remained above last year's record levels. This is largely due to demand from investments in data centers and power equipment for a worldwide AI buildout.
Export growth
AI-related exports boost China's economy
Goldman Sachs and Nomura Holdings estimate that China's exports of semiconductors, computers, and other AI-related products contributed to nearly half of its April export growth. The surge in demand for these goods, along with a global oil shock from the Iran war, pushed China's export prices up at their fastest rate in three years last month.