Tariff Headwinds and Domestic Tailwinds: China’s Manufacturing Outlook for 2025

Summary

It has been more than two months since the Trump administration announced reciprocal tariffs, with tariffs on Chinese goods at one stage exceeding 100%. These measures have raised widespread concern that China’s economic recovery could be significantly hindered in 2025, following a period of slower growth throughout 2023 and 2024. While recent monthly indicators suggest a slowdown in China’s manufacturing sector in April and May, a broader examination indicates that the tariffs are unlikely to cause an outright economic decline but may delay the return to robust growth.

Impact of tariffs on Chinese manufacturing

The tariffs have primarily affected China’s manufacturing exports, with several key indicators reflecting this pressure:

1. Manufacturing PMI and export performance
China’s manufacturing Purchasing Managers’ Index (PMI) fell into contraction territory in April and May, registering 49.0 and 49.5 respectively, after recovering above 50 in February and March. Export growth also slowed; April saw year-on-year growth of 8.1%, a drop from 12.3% growth in March before tariffs took full effect. Exports to the United States (China’s third-largest trade partner) accounted for approximately 15% of total exports in 2024, but declined 21% year-on-year in April 2025, underscoring the considerable pressure tariffs exerted on export volumes.

2. Price and deflationary pressures
Consumer Price Index (CPI) and Producer Price Index (PPI) trends point to ongoing deflationary pressures as of April 2025, with both indices continuing to decline. The reduced demand from US markets is contributing to excess supply within China, which in turn weighs on prices.

3. Supply chain shifts: The “China+1” strategy
US tariffs are encouraging manufacturers to diversify production outside of China, accelerating the adoption of the “China+1” approach. This trend benefits alternative manufacturing hubs, notably Southeast Asia and India, where manufacturing industry output (MIO) growth is projected at 4.0%, surpassing China’s revised forecast.

Consequently, we have adjusted China’s MIO growth forecast downward from 3.2% to 2.9% in the latest May projection, compared with our February forecast.

Domestic demand and recovery in some Chinese industry sectors

Despite export-related challenges, China’s domestic economy demonstrates signs of resilience and gradual recovery, as reflected in multiple indicators:

1. Consumer spending
Retail sales of consumer goods increased by 5.1% year-on-year in April 2025. Since late 2024, consumer spending has been supported by government-issued consumer coupons, with particular strong performance in electronics and durable goods. Stabilization in the housing market, along with improved stock market performance, has bolstered consumer confidence.

2. Industrial enterprises’ profitability
After six consecutive months of decline, profits for industrial enterprises started to recover from March 2025. While tariffs are prompting some pressure on Chinese suppliers to lower prices for US buyers, profit margins had already been compressed due to price competition throughout 2023 and 2024. This suggests limited scope for further significant margin reductions.

Outlook

Overall, China’s manufacturing sector is on a path of gradual recovery, despite the headwinds from tariffs. Growth in China’s MIO is expected to rise from a low base of 2.0% in 2024 to 2.9% in 2025 and 3.5% in 2026, with a CAGR of 3.4% projected through to 2029. The stabilization of the housing market and sustained domestic demand will be critical drivers of this recovery.

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