China’s manufacturing industry in 2025

summary

It has been more than two months since the Trump administration announced mutual tariffs, but tariffs on certain stages of Chinese products have exceeded 100%. These measures raised widespread concern that slow growth between 2023 and 2024 could significantly hinder China’s economic recovery in 2025. Meanwhile, recent monthly metrics suggest a slowdown in China’s manufacturing sector in April and May.

The impact of tariffs on manufacturing in China

Tariffs primarily affect exports of Chinese manufacturing, and there are several important indicators that reflect this pressure.

1. PMI manufacturing and export performance
After recovering to over 50 in February and March, the Chinese Manufacturing Manager Index (PMI) registered 49.0 and 49.5 in April and May, respectively. Export growth has also slowed down. In April, there was an 8.1% increase from the previous year, down from 12.3% growth in March before tariffs were fully in effect. Exports to the US (China’s third largest trading partner) accounted for around 15% of total exports in 2024, but in April 2025 it fell 21% year-on-year, highlighting the substantial pressure tariffs on export volumes.

2. Price and deflationary pressure
The trends in the Consumer Price Index (CPI) and Producer Price Index (PPI) indicate ongoing deflationary pressures as of April 2025, with both indices continuing to decline. The decline in demand from the US market has contributed to excess supply within China, resulting in heavy prices.

3. Supply Chain Shift: China +1 Strategy
US tariffs encourage manufacturers to diversify production outside of China, accelerating the adoption of the “China+1” approach. This trend benefits alternative manufacturing hubs, particularly in Southeast Asia and India. This is expected to grow in the manufacturing industry at 4.0%, surpassing China’s revised forecast.

As a result, compared to the February forecast, the latest May forecast adjusted China’s MIO growth forecast downwards from 3.2% to 2.9%.

Domestic demand and recovery in some Chinese industrial sectors

Despite export-related challenges, China’s domestic economy shows signs of resilience and progressive recovery, as reflected in multiple indicators.

1. Consumer spending
Retail sales of consumer goods increased 5.1% year-on-year in April 2025. Starting in late 2024, consumer spending has been supported by government-issued consumer coupons, particularly strong performance in electronics and durable goods. Stabilizing the housing market is strengthening consumer trust, along with improving stock market performance.

2. Profitability of industrial companies
After a sixth consecutive month of decline, profits for industrial companies began to recover from March 2025. Tariffs have pushed Chinese suppliers to lower prices for US buyers, but profit margins have already been reduced throughout 2023 and 2024 due to price competition.

3. Construction Sector Indicator
The contraction in home sales has eased compared to the past two years. Furthermore, the excavator market (a key barometer of China’s construction activities) showed significant growth, with shipments in the first quarter of 2025 up 23.8% year-on-year, and domestic shipments increased by 38.3%. The growth of this sector is supported by government initiatives that promote infrastructure development and equipment upgrades, including subsidies to replace outdated machines.

Outlook

Overall, China’s manufacturing sector is on a gradual recovery path despite headwinds from tariffs. China’s MIO growth is expected to increase from a low 2.0% base in 2024 to 2.9% in 2025 and 3.5% in 2026, with a CAGR of 3.4% forecast until 2029. Stabilization of the housing market and sustained domestic demand are key drivers of this recovery.

However, China’s manufacturing growth may remain moderate in the medium term. As a mature economy facing increasing structural adjustments and manufacturing capacity transfers under the “China+1” trend, China is expected to not coincide with the rapid growth trajectory expected for India and several Southeast Asian economies over the next five years.