China’s Prolonged Factory Slump Deepens Structural Concerns Despite US Trade Truce

Gerik

Summary:

China’s manufacturing sector contracted for the seventh consecutive month in October, reaching a six-month low, reigniting calls for additional stimulus despite a temporary easing of trade tensions following the Trump-Xi summit....

Manufacturing Weakness Persists, Undermining Truce Optimism

China’s factory activity remained firmly in contraction in October, with the official Purchasing Managers’ Index (PMI) falling to 49.0, its lowest since April. This marks the longest streak of manufacturing decline in over nine years, just as Beijing and Washington reached a tentative trade truce. While the diplomatic breakthrough has reduced headline tariff risks, the economic fundamentals suggest a more serious structural slowdown that short-term external relief is unlikely to reverse.

The October slump was primarily driven by a steep decline in new orders both domestic and export-oriented as well as falling production levels. The output sub-index dropped below the 50 mark for the first time since Trump’s “Liberation Day” tariff campaign earlier this year. Meanwhile, the new export order sub-index also reached its worst level since that period, signaling persistent foreign demand fragility.

Trade Truce Offers Symbolic Relief but Limited Economic Uplift

Despite President Trump’s pledge to cut tariffs and de-escalate trade tensions, Chinese manufacturers appear largely unenthused. While some exporters voiced hope that the truce would improve order books, many remain skeptical due to the volatility of U.S. trade policy under Trump and the broader reorientation of global supply chains away from China. Several businesses acknowledged that they no longer view the U.S. as a dependable market and are actively diversifying exports to mitigate future risks.

Net exports have accounted for nearly one-third of China’s GDP growth in 2025, and while alternative markets have helped cushion the blow, expectations for fourth-quarter performance remain subdued. Analysts widely anticipate that the final stretch of the year may mark the weakest quarterly growth since the 2022 Covid-era lockdowns.

Domestic Fragility Fuels Demand for Policy Easing

The National Bureau of Statistics partially attributed the October contraction to fewer working days during the National Day holidays and global uncertainty. However, analysts like ING’s Lynn Song emphasized that the poor data reflects more than seasonal effects it underscores the need for continued policy support. This view is echoed by Zhaopeng Xing of ANZ Bank, who argued that stimulus is essential to prevent further economic deterioration.

While the non-manufacturing PMI rose slightly to 50.1, buoyed by holiday-related services like travel and accommodation, the overall composite index reflects stagnation. The weakness in core industrial sectors suggests that consumption alone cannot stabilize momentum without broader structural support.

Stimulus Already Underway, But May Prove Inadequate

Since late September, Beijing has introduced a 1 trillion yuan ($141 billion) stimulus package, including unspent provincial bond quotas and policy bank funding. These measures aim to boost public investment and repay local government arrears to private contractors. However, the manufacturing slump indicates that these efforts have yet to translate into broader industrial recovery.

Economists expect further monetary easing in the coming months. The People’s Bank of China is projected to lower policy rates and reduce bank reserve requirements, injecting liquidity into the financial system. Yet, Bloomberg Economics analysts argue that the improving external environment and proximity to the 5% annual growth target may reduce urgency for deeper stimulus in the near term.

China’s Five-Year Outlook: Dual Emphasis on Tech and Consumption

Beijing’s long-term strategy remains anchored in technological advancement and manufacturing strength. The next five-year plan emphasizes “extraordinary measures” to achieve breakthroughs in core technologies and enhance export control frameworks. At the same time, officials have committed to significantly raising the role of domestic consumption in GDP composition, acknowledging the unsustainability of export dependence.

According to Union Bancaire Privée’s Carlos Casanova, the emerging global bifurcation defined by U.S.-China technological rivalry demands that investors and businesses adapt their strategies. As both nations entrench their economic spheres of influence, companies must recalibrate to thrive in a world increasingly split between competing systems.

Although the Trump-Xi truce has momentarily cooled geopolitical tensions, it has not reversed the economic momentum loss in China’s industrial base. The prolonged factory slump, weak new orders, and tepid sentiment all point to structural constraints that require more than symbolic diplomacy. Without stronger domestic demand or substantial policy intervention, the risk remains that China’s manufacturing downturn could bleed into broader economic fragility, particularly as global economic power continues to reorganize along strategic lines.

Source: Bloomberg

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