China’s Manufacturing Slowdown: A Global Warning Sign?

In an earlier analysis, I cautioned that China’s manufacturing-driven growth was vulnerable to both internal demand weaknesses and external trade uncertainties. I noted: "China is the largest trading partner of over 100 countries. It is also tightly integrated into Asia’s supply chains. In 2022, over 19% of Japan’s intermediate goods imports came from China. The figure was more than one-third for South Korea and over 38% for Vietnam. In this context, any slowdown in China whether driven by production or foreign demand has the potential to affect not only China but the entire region and global production systems."

Is that warning now materializing? China’s manufacturing sector showed clear signs of deterioration in May 2025, signaling a deeper undercurrent of economic instability that may extend far beyond its borders. According to the latest data from S&P Global, the headline Manufacturing Purchasing Managers' Index (PMI) fell sharply to 48.3 in May, down from 50.4 in April. This marked the first contraction in eight months and the lowest reading since September 2022. The figure reflects not just a cyclical fluctuation but a growing structural concern.

Source: https://www.pmi.spglobal.com/Public/Home/PressRelease/56042e5fa0a541ff9d2504a398bf6e53

Demand Erosion and Output Contraction

Central to this weakening was a significant drop in new orders, which fell at the fastest rate in over two-and-a-half years. Export orders also shrank for a second consecutive month, revealing sustained external demand fragility. This drop in demand immediately translated into reduced factory output. May witnessed the first decline in manufacturing production in 19 months. Manufacturers, facing tepid order books, reacted by scaling back purchases and cutting staff. Employment in the sector fell for the eighth time in the past nine months, with investment goods producers laying off significant numbers of workers.

Source: https://www.pmi.spglobal.com/Public/Home/PressRelease/56042e5fa0a541ff9d2504a398bf6e53

Inventory Mismatches and Supply Chain Pressures

Compounding these issues was a slight accumulation of finished goods inventories, the first such rise in four months. Surveyed firms attributed this to falling sales and delayed outbound shipments, highlighting a mismatch between production and consumption. This mismatch has been one of China’s gravest economic challenges, and the government has been trying various measures to boost domestic consumption. Meanwhile, supplier delivery times lengthened marginally for the third straight month, a subtle but persistent indication of lingering supply chain inefficiencies.

Deflationary Undercurrents

Adding to the concern, both input and output prices declined more sharply in May. Lower raw material and energy costs were passed on to clients, but heightened competition also forced firms to suppress output charges. Although this might seem beneficial to consumers, it also reflects deflationary pressures—a common symptom of weak demand and underutilized capacity. Interestingly, there was a slight uptick in export charges, the first in nine months, suggesting isolated pricing power in niche export segments.

We must remember the recent dynamic: overseas buyers had aggressively stockpiled Chinese goods out of fear that tariffs might raise future costs. Now, warehouses are full, demand has slowed, and the cycle has reversed. Export demand has weakened, and domestic demand has not filled the gap. These developments also help explain the U.S. economic slowdown in the first quarter of 2025.

Policy Limitations and Structural Challenges

Despite a modest rebound in business optimism, likely stemming from hopes that U.S.-China trade tensions may ease, macroeconomic conditions remain fragile. Earlier policy measures to stimulate consumption appear to have had limited and fading effects.

Firms continued to reduce backlogs rather than grow production, and consumption still remains weak. Without bolstering domestic demand through meaningful improvements in household income and job security, China risks deeper stagnation.

The Danger Point Might Approach

China may not yet be in a formal recession, but it might edge dangerously close to it. The confluence of weakening demand, employment contraction, inventory mismatches, and declining prices suggests that this is more than a temporary soft patch. Given China’s central role in global trade and manufacturing, a sustained downturn would reverberate through international production systems, regional economies, and even asset markets.

In this context, what happens next in China will not stay in China. The global economy must take note. A slowdown in the world’s manufacturing hub could easily become a shock felt everywhere.

Let’s see what further policy responses the Chinese government introduces to address these grave problems since the Trump side is going to continue to be the source of global uncertainty and insecurity.

If China stumbles, the world will feel the shockwaves.