China’s factory activity remained stagnant in May, according to data released by the National Bureau of Statistics, raising concerns about the country’s ability to insulate its economy from the global fallout of the Iran war. The official manufacturing purchasing managers index (PMI) held steady at 50, down from 50.3 in April, with readings above 50 indicating expansion.
Energy Security Shields China
While other nations grapple with inflationary pressures driven by surging oil prices due to the Strait of Hormuz closure, China’s robust energy reserves and diversified energy sources have cushioned the impact. Frederic Neumann, Chief Asia Economist at HSBC, noted, “Though the energy crisis remains the dominant headwind for Asia, China is relatively more shielded given its robust energy security set-up.”
Exports Drive Growth Amid Domestic Slump
Exports continue to be a critical driver for China’s economy, particularly to Europe and Southeast Asia. Despite a decline in exports to the U.S. over the past year, high-tech and automotive sectors have bolstered global trade. However, domestic demand remains weak, weighed down by a prolonged property sector downturn that has dampened consumer confidence and investment.
“Domestic demand is lagging, but high-end manufacturing and exports are holding the line,” wrote Robin Xing, Chief China Economist at Morgan Stanley.
Chinese leaders have set a modest annual economic growth target of 4.5% to 5% for this year, the lowest since 1991. While analysts believe China may still meet its 2026 target, the trajectory of oil prices and global supply chain stability remain pivotal factors in determining the nation’s economic outlook.