China’s Factory Activity Shrinks For Sixth Consecutive Month Amid Trade Tensions

China's manufacturing sector contracted for the sixth consecutive month in September, marking the longest downturn since the 2019 trade war escalation, as persistent US trade frictions and domestic weaknesses continue to stifle growth. The official Purchasing Managers' Index (PMI) for manufacturing rose marginally to 49.8 from August's 49.4 but stayed below the 50 threshold that separates expansion from contraction on the 0-100 scale, according to the National Bureau of Statistics (NBS).

While new orders and production sub-indices showed slight month-on-month gains—reflecting modest upticks in export demand and factory output—the overall reading underscores a fragile recovery hampered by price wars and subdued consumer confidence. This prolonged slump, the first of its duration since 2020's pandemic disruptions, signals deepening challenges for the world's second-largest economy, which grew at a modest 4.6% in the first half of 2025, below Beijing's 5% target.

A contrasting private survey offered glimmers of optimism, with Caixin's PMI climbing to 51.2 from 50.5, dipping into expansion territory and highlighting resilience in small and medium-sized enterprises. The divergence between the official NBS PMI—weighted toward large state-owned firms—and Caixin's focus on private players illustrates a bifurcated industrial landscape: state giants grapple with overcapacity, while nimbler exporters benefit from niche markets.

Analysts like Stephen Innes of SPI Asset Management likened the data to "a car with one cylinder firing while another misfires," noting factories are ramping up shipments but at razor-thin margins due to aggressive discounting. "They're being forced to do it like street vendors selling more bowls of noodles at half price just to keep the crowd coming," Innes observed, pointing to intensified competition in sectors like electronics and machinery.

The data arrives against a backdrop of renewed US-China trade hostilities under President Donald Trump's second term. Tariffs on $300 billion of Chinese goods, hiked post-inauguration in January 2025, have eroded exporter confidence, with retaliatory measures from Beijing on American agriculture and tech imports. A temporary tariff pause, extended to November 2025, stems from a September 19 call between Trump and Xi Jinping, where both leaders expressed intent to de-escalate.

Hopes for a broader deal pivot on resolving the TikTok saga: the US demands ByteDance divest to an American entity like Oracle or Microsoft, a move requiring Chinese regulatory approval amid national security laws. A pivotal face-to-face summit is slated for late October in South Korea during the Asia-Pacific Economic Cooperation (APEC) forum, potentially unlocking concessions on intellectual property and market access.

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Broader headwinds compound the manufacturing malaise. A property crisis, triggered by 2021's Evergrande default, has wiped out household wealth and curbed construction activity, which accounts for 25% of GDP. Youth unemployment hovers at 15%, dampening consumption, while deflationary pressures—producer prices fell 0.5% year-on-year in August—deter investment. NBS chief statistician Dong Lihui struck a cautiously positive note, citing accelerating output as evidence of "gaining momentum", but economists urge bolder stimulus.

The People's Bank of China (PBOC) held key rates steady this month despite the US Federal Reserve's September cut to 4.75-5%, awaiting clearer signals. Speculation mounts for a year-end PBOC easing—possibly a 10-20 basis point loan prime rate reduction—to spur lending and revive sentiment. As China navigates these pressures, September's PMI offers a tepid lifeline, but without a trade thaw and domestic revival, the six-month skid risks morphing into a deeper recession.

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