China Manufacturing Expands in June Driven by AI Demand

China's factory activity returned to expansion in June, with the official manufacturing purchasing managers index (PMI) rising to 50.3 from 50.0 in May. The National Bureau of Statistics attributed this growth to robust demand for artificial intelligence hardware, including chips and computers, and a surge in exports to the United States as firms front-load shipments to avoid Section 301 tariffs scheduled for late July.

High-tech manufacturing showed particular strength with a PMI of 53.5, while the non-manufacturing PMI rose to 50.2. S&P Global reported that the second quarter marked the strongest performance for the sector since late 2020, with a quarterly average PMI of 51.9 and the fastest rate of job creation since August 2023. However, S&P Global also noted a second consecutive month of falling new export orders and a decline in business confidence to its lowest level since January.

Despite the manufacturing rebound, the broader economy remains strained by a prolonged property sector slump and sluggish consumer spending, highlighted by a first-time decline in retail sales over three years in May. To counter these conditions, the People's Bank of China has instructed commercial banks to increase lending. Geopolitical tensions remain high following a May meeting between Donald Trump and Xi Jinping that failed to resolve tariff disputes or Beijing's influence over Tehran.