China's Factory Activity Rebounds, But Trade Risks Loom Large

China's manufacturing sector has shown signs of recovery, with the official manufacturing PMI (Purchasing Managers' Index) returning to expansion territory in April 2025. The PMI stood at 50.4, indicating a rebound in factory activity after a brief contraction in March. However, investors should remain cautious, as geopolitical tensions and trade uncertainties pose significant risks to China's economic growth and investment prospects.



The rebound in China's manufacturing PMI is driven by several factors, including policy support, export boom, and domestic demand. The Chinese government has implemented supportive policies since September 2024, which have delivered tangible results. Additionally, China's exports have been resilient, driven by strong global demand and the country's complete supply chain. Although domestic demand has been lackluster, there is some improvement in market demand, as reflected in the rise in the new orders sub-index.

However, investors should be aware of the primary risks associated with China's trade relations, particularly with the US and EU. These risks can be categorized into several aspects:

1. Trade Tensions and Tariffs: The US-China trade war has led to significant tariffs on goods traded between the two countries, affecting approximately 58% of US exports to China and about 66% of Chinese exports. The EU has also expressed concerns about China's trading practices and manufacturing overcapacity, leading to increased scrutiny and potential trade restrictions. In the near to medium term, these trade tensions may evolve, with the US and EU potentially imposing more tariffs and other trade restrictions on Chinese goods, affecting China's export volumes and trade balance.
2. Geopolitical Tensions: Rising geopolitical tensions between China and key countries in the region and the US may disrupt trade patterns and increase risks for Chinese businesses operating overseas. These tensions may lead to further decoupling of supply chains, making it more challenging for China to maintain its position as a critical end-supplier in global value chains.
3. Industrial Hollowing Out: As Chinese enterprises seek new markets to mitigate the risks of trade friction, there is a risk of 'industrial hollowing out' in China, where production and manufacturing capabilities are shifted overseas. This may lead to a decline in China's competitiveness in lower value-added manufacturing sectors and a loss of domestic jobs.
4. Economic Slowdown and Domestic Headwinds: China's economic growth has been slowing down, with real GDP growth averaging +7.7% over 2010-2019, +2.2% in 2020, +8.5% in 2021, +3.0% in 2022, and expected to be +4.6% in 2025 and +4.2% in 2026. Domestic headwinds, such as low consumer confidence, the property sector downturn, and limited fiscal and monetary policy support, may continue to impact China's economic growth and trade relations.

To balance the opportunities presented by China's economic resilience with the risks posed by geopolitical tensions and trade uncertainties, investors can consider the following strategies:

1. Diversification: Diversify investments across various sectors and regions to mitigate risks associated with geopolitical tensions and trade uncertainties.
2. Long-term perspective: Maintain a long-term perspective on investments in China, focusing on the country's structural reforms and growth potential.
3. Risk management: Implement robust risk management strategies to monitor and manage geopolitical and trade risks.
4. Engage with local partners: Collaborate with local partners who have a deep understanding of the market and can provide valuable insights into navigating geopolitical and trade uncertainties.
5. Policy monitoring: Keep a close eye on policy developments, both in China and in key trading partners.
6. Invest in emerging sectors: Focus on emerging sectors with strong growth potential, such as technology, renewable energy, and healthcare.
7. Stay informed: Stay up-to-date with the latest developments in China's economy, politics, and trade relations.

In conclusion, China's manufacturing PMI rebound signals a recovery in the manufacturing sector, but investors should remain cautious due to the primary risks associated with China's trade relations. By adopting a balanced approach that considers both opportunities and risks, investors can effectively navigate the complex landscape of China's economic growth and trade uncertainties.