China’s service sector business activity index reached 50.2% in May, marking a 0.1 percentage point increase from April, though the growth remained slightly weaker than seasonal expectations. Holiday effects boosted tourism, transportation, and catering consumption, while financial services continued to underperform.
Construction Sector Experiences Seasonal Decline
The construction business activity index fell to 51.0% in May, down 0.9 percentage points from April and performing below seasonal norms. While civil engineering projects accelerated nationwide, the real estate market showed significant weakening.
Manufacturing PMI Rebounds Stronger Than Seasonal Trends
The manufacturing Purchasing Managers’ Index (PMI) rose to 49.5% in May, up 0.5 percentage points from April, with four of five sub-indices showing improvement. A substantial rebound in new export orders drove simultaneous recovery in supply and demand, with signs of inventory replenishment emerging among enterprises.
Service Sector: Modest Recovery Below Seasonal Norms
The service sector index’s 0.1 percentage point increase to 50.2% in May fell short of the pre-pandemic average seasonal increase of 0.2 percentage points. While new orders and business expectations improved slightly, employment indicators declined.
Transportation, accommodation, and catering sectors benefited from holiday demand, while postal services, telecommunications, and IT services maintained strong performance above 55%. Financial services, however, dropped below the expansion threshold.
Construction: Infrastructure Gains Offset by Real Estate Weakness
The construction sector’s 0.9 percentage point decline exceeded typical seasonal patterns. Civil engineering projects showed continued acceleration with the sub-index reaching 62.3%, while real estate construction remained sluggish.
Local government bond issuance rebounded to 779.4 billion yuan in May, with special-purpose bonds accounting for 56.9% of total issuance compared to 33.7% in previous months. However, real estate markets showed continued weakness in both primary and secondary markets.
Manufacturing: Export-Driven Recovery Emerges
The manufacturing PMI’s 0.5 percentage point increase to 49.5% outperformed seasonal expectations following mid-May developments in U.S.-China trade negotiations. Key improvements included:
1. Demand recovery led by exports (new export orders up 2.8 percentage points)
2. Accelerated production (production index returning to expansion at 50.7%)
3. Early signs of inventory replenishment
4. Divergence among industries, with equipment manufacturing outperforming
5. Varied performance by enterprise size, with large firms returning to expansion
Price Trends: Continued Deflationary Pressures
Both input and output price indices declined further in May, with the Producer Price Index expected to show increased year-on-year deflation around -3.3%. Commodity prices showed mixed performance internationally, while domestic industrial prices continued their downward trend.
Policy Outlook: Preparing Additional Measures
With export momentum showing resilience but domestic demand remaining uneven, policymakers are preparing additional measures. Recent focus has included:
- Accelerated special bond issuance for infrastructure
- Development of new policy financial instruments
- Preparation of dual-priority project lists
- Ongoing policy research for potential future implementation
While second-quarter GDP growth may maintain around 5% due to export resilience, uncertainty in trade negotiations and domestic demand weakness may require additional policy support in the second half to achieve annual economic targets.
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