China Factory PMI Returns to Growth on AI Export Demand

China's official manufacturing Purchasing Managers' Index (PMI) rose to 50.3 in June from 50.0 in May, indicating a return to expansion and surpassing the 50.1 consensus forecast. The non-manufacturing PMI, covering services and construction, also improved to 50.2 from 50.1, and the composite PMI reached 50.6 from 50.5. Growth was largely driven by robust high-tech exports linked to artificial intelligence demand.

Automated data processing equipment exports, including semiconductors and AI components, surged 60% year-on-year in May. This contrasted with slower growth in broader consumer goods exports, such as furniture, which increased by only 1.9% over the same period. This narrow recovery suggests a reliance on global technology demand rather than broad-based economic strength.

Domestic Demand Challenges Persist

Challenges persist within China's domestic economy

Challenges persist within China's domestic economy. Retail sales declined in May for the first time in over three years, while new home prices fell at an accelerated pace, highlighting ongoing weakness in household spending and the property sector. The central bank recently instructed some commercial banks to boost lending, suggesting authorities acknowledge underlying economic softness and are implementing supportive measures.

Further export activity might be pulled forward in the near term as exporters accelerate shipments ahead of new Section 301 tariffs due from late July. However, this effect is expected to fade. Analysts are watching for confirmation that AI-export strength can offset property and retail sector weaknesses through Q3 2026.