China’s Economic Outlook Dims as Factory Activity Hits Nine-Year Low

China’s manufacturing sector has experienced its longest period of contraction in more than nine years, underscoring persistent economic fragility despite a recent easing of tensions with the United States. The prolonged downturn has reignited calls for stronger policy intervention as weak domestic demand, trade barriers, and cautious business sentiment continue to weigh on the country’s industrial performance.

The official manufacturing purchasing managers’ index (PMI) fell to 49 in October, below expectations and marking the steepest decline in six months. A reading below 50 indicates contraction, suggesting that factory output remains under pressure even as diplomatic efforts aim to stabilize relations with the United States. The deterioration came just ahead of a high-profile meeting between President Xi Jinping and U.S. President Donald Trump, which produced a limited trade truce intended to ease tariff tensions. However, the economic data reveal that underlying structural challenges persist, with new orders shrinking at their fastest pace since 2023 due to both external headwinds and weak domestic consumption.

Lynn Song, Chief Greater China Economist at ING Bank NV, described the figures as “a discouraging start to the fourth quarter,” adding that the results serve as a reminder of the need for continued policy support. The data highlight the fragility of the manufacturing sector, which has struggled to sustain momentum amid fluctuating global demand and ongoing uncertainty surrounding trade relations.

The PMI’s output sub-index dropped below the 50-point threshold separating growth from contraction for the first time since April, when the U.S. administration imposed what it dubbed “Liberation Day” tariffs on Chinese imports. Meanwhile, the sub-index for new export orders recorded its weakest level since the same period, underscoring the lingering impact of global trade restrictions on China’s export-driven industries. Despite these discouraging figures, economists Chang Shu and Eric Zhu argued that additional stimulus measures in the fourth quarter are unlikely. They noted that recent improvements in the external environment, including trade agreements with the U.S., as well as China’s steady progress toward meeting its annual growth target, have somewhat reduced the urgency for further monetary or fiscal easing.

Nevertheless, the slowdown in factory activity suggests that Chinese manufacturers may find limited relief from the tariff reductions agreed upon by Presidents Trump and Xi. While the trade truce offers short-term stability, weak domestic demand, coupled with broader concerns about the global economic outlook, will likely continue to constrain industrial growth. The persistent caution among Chinese consumers has further complicated the recovery, as household spending has yet to rebound to pre-pandemic levels despite government incentives and a gradual improvement in the labor market.

In contrast to manufacturing, the non-manufacturing PMI, which reflects conditions in the construction and services sectors, inched up to 50.1 in October. The modest improvement was largely attributed to increased tourism and consumer activity during the eight-day National Day holiday. The data indicate that the services sector is benefiting more than manufacturing from recent policy measures designed to stimulate domestic spending.

Interviews with Chinese exporters conducted by Bloomberg News revealed cautious optimism about the potential benefits of the trade truce. Some firms expect a moderate recovery in export orders but remain wary after several years of trade turbulence. Many exporters noted that the uncertainty of U.S. policy has prompted them to diversify their customer base and reduce reliance on the American market. This shift has proven essential to China’s economic resilience: with net exports contributing nearly one-third of the nation’s overall growth this year, the ability of firms to expand into alternative markets has been instrumental in keeping China on track to meet its roughly 5% annual growth goal. However, many analysts predict that the final quarter of 2025 will mark the slowest period of economic performance since the disruptions caused by the 2022 zero-COVID lockdowns, as external demand remains fragile and business confidence subdued.

To counter these headwinds, Beijing has implemented an additional stimulus package worth approximately 1 trillion yuan ($141 billion) since late September. This initiative includes the use of previously unused local government bond quotas to finance infrastructure projects, repay outstanding debts to private enterprises, and channel new funding to policy banks in an effort to boost investment. These measures are intended to provide targeted support to struggling sectors and ensure that liquidity reaches smaller manufacturers and local economies that have been disproportionately affected by the downturn.

Looking toward the future, Chinese policymakers have made it clear that technological innovation and industrial upgrading will remain central to the country’s economic strategy over the next five years. At a key policy meeting in October, officials outlined a plan to take “extraordinary measures” to achieve breakthroughs in core technologies while simultaneously strengthening export controls. The strategy reflects Beijing’s dual ambition to reduce its dependence on foreign technology and to position itself as a global leader in advanced manufacturing and innovation. The government has also pledged to “significantly” increase the role of consumption in driving growth, signaling a gradual but important shift toward a more balanced economic model.

Carlos Casanova, Senior Asia Economist at Union Bancaire Privée in Hong Kong, noted that the global economy is increasingly defined by a bifurcated structure in which the United States and China dominate separate technological and economic spheres. He emphasized that both investors and manufacturers must adapt their strategies to this evolving landscape, aligning themselves with the realities of a world divided between two major centers of power.

In summary, while China’s trade truce with the United States provides temporary relief, the country’s manufacturing downturn underscores the complexity of its economic recovery. With weak domestic demand, global uncertainties, and the lasting effects of trade tensions, sustained policy support and structural reform will be crucial for stabilizing growth. At the same time, China’s renewed emphasis on technological self-reliance and industrial modernization signals its determination to navigate an increasingly fragmented global economy on its own terms.