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China’s manufacturing sector showed a surprising return to growth in June, led by a revival in export-focused production, according to a private sector survey that contrasts with more pessimistic official data.

The Caixin/S&P Global Manufacturing Purchasing Managers’ Index (PMI) climbed to 50.4 in June from 48.3 in May, surpassing analysts’ expectations of 49.0 and crossing the 50-mark threshold that separates expansion from contraction. This marks the eighth month of growth in the past nine, suggesting that some parts of China’s industrial base are regaining momentum despite global headwinds.

“This indicates improving market conditions and resilience in China’s private sector manufacturing,” said Wang Zhe, Senior Economist at Caixin Insight Group.

Divergence Between Private and Official Reports

While the Caixin PMI showed expansion, China’s official manufacturing PMI, released one day earlier by the National Bureau of Statistics, reported contraction for the third straight month, though it did show a slight improvement compared to previous readings.

The conflicting signals stem from differences in methodology and sample size. The official PMI surveys over 3,000 large, mostly state-owned or upstream companies at month-end, while the Caixin index focuses on around 500 private, export-driven firms and conducts its survey mid-month.

Andrew Tilton, Chief Asia-Pacific Economist at Goldman Sachs, attributed the Caixin rebound partly to a “delayed response” to the U.S.-China tariff reduction announced in mid-May. “Timing and coverage differences explain much of the divergence,” he wrote in a note.

Output Grows, But Exports and Jobs Remain Weak

The key driver of the Caixin PMI’s improvement was a surge in production, which rose at the fastest pace since November 2023, supported by promotional efforts and slightly improved trade conditions. However, new export orders declined for the third consecutive month, suggesting that global demand is still fragile.

Hiring remained a weak spot. Manufacturers stayed cautious, cutting staff or freezing hiring plans to keep costs low. The consumer goods sector was particularly hard-hit, with more severe workforce reductions and rising backlogs of work.

Wang Zhe warned that price competition is intensifying. “Many companies were forced to lower prices to attract buyers, squeezing already thin profit margins,” he noted.

Broader Trade Pressures Persist

Exporters have rushed to front-load shipments ahead of the possible expiration of the 90-day U.S.-China trade truce, set to end in mid-August. But as front-loading activity fades, economists at Morgan Stanley expect export momentum to weaken.

China’s exports to the U.S. fell 34.5% year-on-year in May, following a 21% drop in April. While exporters have shifted some focus to Southeast Asia and the European Union, the trade dispute continues to weigh heavily—especially on smaller firms.

Nomura economists noted that smaller exporters are feeling the brunt of elevated tariffs. “The disproportionate impact of the trade war on small and medium-sized firms is becoming increasingly clear,” they wrote.

Signs of Diplomatic Thaw Over Fentanyl Dispute

There may be progress on one front: the U.S. and China appear to be moving toward a fentanyl-related agreement. Last month, China added two fentanyl precursors to its list of controlled chemicals following a rare high-level meeting between U.S. Ambassador David Perdue and China’s Minister of Public Security Wang Xiaohong.

According to Neo Wang, China economist at Evercore ISI, this move could lead to the U.S. lifting a 20% fentanyl-linked tariff on certain Chinese goods. “All signs are pointing toward a gradual de-escalation,” he said.

Manufacturing Still Central to China’s Economy

Despite concerns about oversupply and weakening demand, manufacturing remains a critical part of China’s economy, accounting for roughly 26% of GDP in Q1 2025, according to official data cited by Caixin.

Whether the recent uptick in production signals a sustained recovery or a temporary boost driven by strategic front-loading remains to be seen. For now, manufacturers continue to face a complex mix of external pressures, intense competition, and domestic demand challenges.

Wang concluded, “Business confidence has weakened as the global environment remains uncertain and domestic consumption still lacks momentum. A fundamental turnaround is yet to come.”