China's factory activity returned to expansion in June, driven by demand for chips, computers and other AI-related products, as robust export orders and front-loading to the United States to get ahead of tariffs offset weakness elsewhere in the economy.
The data suggest global AI investment is providing an important cushion for manufacturers in China's $20 trillion economy, even as disruption from the Middle East conflict and a prolonged property slump continue to weigh on broader growth.
The official manufacturing purchasing managers' index (PMI) rose to 50.3 in June from 50.0 in May, according to a survey by the National Bureau of Statistics (NBS). It beat a median forecast of 50.0 in a Reuters poll.
"Exports to meet international demand for chips and other AI-related products, as well as front-loading to get ahead of new US Section 301 tariffs due late July and improved domestic demand due to lower upstream costs underpinned the improvement," said Dan Wang, China director of consultancy Eurasia Group.
The number of domestic infrastructure projects ticked up over the last month too, she added. US retailers have brought forward orders from China by four to six weeks to secure their inventories for Black Friday and Christmas holiday sales before the expected tariff hikes later this year, shipping executives said.
The sub-index for new export orders returned to expansion in June, rising to 50.1 from 48.6, while the production and overall new orders gauges edged up to 51.4 and 51.2 from 51.2 and 49.9, respectively.
Factory gate prices slipped to 48.2 from 51.9 in May, however, following five months of expansion, with employment also continuing to trend downward.
"The export strength is set to continue, driven by global AI investment demand," said Xu Tianchen, senior economist at the Economist Intelligence Unit. "Second, more policy easing will come."
"For example, fiscal spending has lagged behind budget arrangements, and it should accelerate in the coming months. There is also room for monetary easing," he added.
The non-manufacturing PMI, which includes services and construction, improved to 50.2 versus 50.1 in May, while the composite PMI came in at 50.6 compared with 50.5 a month earlier.
AI BOOM OR BUST
With the property crisis showing little sign of stabilizing and household spending remaining subdued, policymakers face the challenge of managing a two-speed economy.
There is enormous international demand for semiconductors powering data centers and advanced electronics, playing to China's manufacturing strengths, but there does not seem to be much demand for anything else.
Exports of furniture, for example, grew just 1.9% in value terms year-on-year, according to the latest trade data for May, while shipments of automated data processing equipment jumped 60% over the same period.
Furthermore, retail sales, a proxy for domestic demand, fell for the first time in over three years, the most recent data for May showed, along with a faster slump in new home prices.
Julian Evans-Pritchard, head of China Economics at Capital Economics, said the improvement "remains heavily dependent on exports and AI-related tech," and warned that "despite the improvement in activity, the manufacturing sector appears to be slipping back into deflation."
China has set a 2026 growth target of 4.5% to 5.0%, slightly below last year's 5% expansion.
With signs of precautionary buying in the wake of Middle East-related price pressures fading, input costs rising and overseas customers running down inventories while awaiting a ceasefire, Chinese manufacturers may increasingly need demand from the world's largest consumer market to regain momentum.
A closely watched meeting in May between US President Donald Trump and Chinese leader Xi Jinping, however, produced no meaningful breakthroughs, whether on tariffs or Beijing using its influence over Tehran to end the Iran war.
"The sluggish data from the past few months will likely result in a notable slowdown in second-quarter GDP," said Lynn Song, chief economist for China at ING.
"We're looking for a slowdown to 4.6% year-on-year, with risks slightly balanced to the downside."
