China's June factory activity unexpectedly expands, private survey shows

China's factory activity unexpectedly returned to growth among export-oriented manufacturers in June, a private survey showed Tuesday, as the country shrugged off headwinds from trade disruptions.

The Caixin/S&P Global manufacturing purchasing managers' index (PMI) came in at 50.4, beating Reuters' median estimate of 49.0 and rebounding from 48.3 in May, which had been its worst contraction since September 2022.

The private survey appeared to diverge from the country's official PMI report, released on Monday, which showed that manufacturing activity contracted for a third consecutive month in June, despite a modest improvement from the previous two months.

The official PMI surveys a larger sample of over 3,000 companies and aligns more closely with industrial output, while the Caixin survey covers a smaller pool of over 500 mostly export-oriented firms, according to Goldman Sachs. The official survey is conducted at month-end, while the Caixin survey is compiled mid-month.

Both manufacturing supply and demand returned to growth in June, according to Caixin, with output expanding at the fastest pace since November. The growth in total new exports, however, was marginal, Caixin noted.

The rebound in Caixin PMI was mostly driven by exports, said Tianchen Xu, senior economist at Economist Intelligence Unit, as "businesses received more export orders after the tariff truce, which pushed up their production."

Xu added that both readings pointed to a recovery in the manufacturing sector.

Despite growing calls for Beijing to rein in its supply overcapacity, manufacturing accounted for around 26% of China's GDP in the first quarter, Caixin said, citing official figures.

Chinese exporters have sought to front-load shipments to avoid U.S. tariffs, which are poised to rise when the 90-day trade truce expires in mid-August. It remains unclear whether both sides will reach an agreement to extend that reprieve further.

So far, the country's outbound shipments have held up relatively strong over the past two months, as exporters pivoted to alternative markets, notably Southeast Asian countries and European Union nations.

Its exports to the U.S. plunged 34.5% in May from a year ago and by over 21% in April.

Morgan Stanley economists, however, pointed to softening export momentum to the U.S. and other destinations in recent weeks as the front-loading activity starts to taper.

"It is becoming increasingly clear that the US-China trade dispute is having a disproportionately large impact on smaller exporters," a team of economists at Nomura said Monday, as the U.S. tariffs on Chinese goods remain elevated despite the truce.

Beijing and Washington may be moving closer to a resolution of the fentanyl dispute, which will likely see the U.S. drop its 20% fentanyl-related tariff on Chinese goods, according to Neo Wang, lead China economist and strategist at Evercore ISI.

"All we've seen so far pointed to further de-escalation," he said in a note.

China last month added two precursors for fentanyl to its list of controlled chemicals, following a rare meeting between U.S. Ambassador to China David Perdue with China's Minister of Public Security Wang Xiaohong. Then, Wang expressed willingness to work with Washington on drug control, according to a Chinese statement.