China’s Industrial Slowdown Deepens as Domestic Demand Falters Despite Export Momentum

Gerik

Summary:

China’s factory activity unexpectedly slipped into contraction in November, with the PMI falling to 49.9 amid weak domestic demand, despite a temporary rebound in exports....

Widening Manufacturing Contraction Signals Uneven Recovery

China’s manufacturing sector showed unexpected weakness in November 2025, with the private RatingDog China General Manufacturing PMI sliding to 49.9, below the expected 50.5 mark and down from 50.6 in October. A PMI below 50 indicates a contraction in industrial activity. This marks the second consecutive month of deceleration and suggests that industrial momentum is losing steam in the world’s second-largest economy. The decline is particularly notable because the RatingDog-S&P Global survey generally portrays a more optimistic outlook than the official PMI, which already recorded an eighth straight month of contraction, coming in at 49.2.

The contraction is closely linked to sluggish domestic demand, as new business orders stagnated. Despite a mild surge in export orders the strongest in eight months the growth in production halted. This reveals a relationship where external demand offers short-term support, but internal market weakness overrides the broader recovery trend. Manufacturers responded by cutting staff and scaling back procurement, reflecting uncertainty in future orders.

Dampened Non-Manufacturing Performance Adds to Headwinds

In parallel, the official non-manufacturing PMI also slipped to 49.5 in November, marking its first contraction since December 2022. This suggests the economic malaise is not limited to factories but has spilled over into services and construction, notably weakened by ongoing distress in the property sector. Real estate and residential services continued to underperform, undermining one of the most significant pillars of China's domestic economy.

The persistent drag from real estate was evident in fixed-asset investment data. Investment fell by 1.7% in the first ten months of 2025, while October alone witnessed a steep year-on-year drop of 11.4%. Property-specific investment shrank by 14.7% for the same ten-month period, up from a 13.9% decline in the third quarter. This data shows a strongly correlated trend between falling fixed-asset investment and broader economic deceleration. The causal link appears to be the lack of policy stimulus translating into real investment growth.

Retail and Industrial Indicators Show Mixed Signals

While industrial output grew 4.9% year-on-year in October, the slowest pace since August, retail sales only climbed 2.9%, marking the fifth straight month of decline. The weakening of retail activity confirms that domestic consumption remains under significant strain. These figures suggest that the recovery is skewed toward supply-side resilience rather than broad-based demand revival.

Adding to the concerns, China’s exports in October fell 1.1% year-on-year the first decline in nearly two years despite previous front-loading of overseas shipments. This drop signifies more than a seasonal effect; it reflects declining global demand and the fading of short-term stockpiling efforts by foreign buyers.

Growth Forecast Faces Downward Pressure Despite Trade Truce

The broader implication is that China’s economic growth will likely dip below 4.5% in Q4, down from 4.8% in Q3, according to OCBC’s Tommy Xie. The decline appears to stem from a convergence of soft consumption, delayed infrastructure impact, and persisting property woes. The government’s efforts to stabilize growth, including anticipated policy directions from the upcoming Central Economic Work Conference, may be crucial to reversing the downtrend.

Meanwhile, geopolitical dynamics show signs of temporary easing. A trade détente was reached in late October between President Trump and Xi Jinping, with the U.S. agreeing to roll back certain tariffs and pause regulatory measures in exchange for China’s cooperation on fentanyl and rare earths. While this move reduces short-term policy uncertainty and may support export sentiment, it is unlikely to revive domestic demand in the near term.

Persistent Deflation Risk Despite Market Stability

Bank of America analysts noted that demand-side weaknesses could prolong deflationary pressures into 2026. Although equity markets reacted mildly positively with the CSI 300 up 0.36% and Hang Seng Index rising 0.74% these gains may be driven more by speculative sentiment than by fundamental economic improvements. The offshore yuan stabilized at 7.0711 against the dollar, indicating limited currency pressure but also no strong capital inflows to reinvigorate domestic sectors.

In sum, the data from November paints a cautious picture for China’s economic trajectory. While exports briefly buoyed optimism, the structural issues within domestic demand and investment remain deeply entrenched. Without a more forceful fiscal or monetary push, China may struggle to meet its 5% growth target in the coming year.

Source: CNBC

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