China's factory activity grew in December, albeit at a slower-than-expected pace, as falling export orders and trade uncertainties weighed on overall sales, according to a private-sector survey released Thursday. The Caixin/S&P Global manufacturing PMI declined to 50.5 in December from November’s 51.5, missing analysts' expectations of 51.7. While the index remained above the 50-point threshold that separates growth from contraction, the slower expansion underscored challenges for the manufacturing sector.

The report highlighted a three-month low in the rate of output expansion, driven by a slowdown in new orders. Notably, export orders contracted for the fourth time in five months, reflecting subdued global economic conditions and fears of new U.S. tariffs. These developments pose significant risks to China’s position as the world’s leading exporter. Some exporters had accelerated shipments in anticipation of U.S. tariff hikes in 2025, but this temporary boost now appears to be fading, as noted in a report by China Beige Book.

Policy measures introduced by Beijing in late 2024 to stabilize the economy have yielded mixed results. While some sectors have shown signs of recovery, the broader manufacturing industry remains under pressure. Policymakers are prioritizing domestic demand revival, with plans to increase household incomes and promote consumption through measures such as expanded trade-in schemes for consumer goods and higher pensions.

Despite these challenges, Chinese manufacturers retained a cautiously optimistic outlook for 2025. However, the degree of optimism has diminished to its lowest level since September, reflecting concerns over growth and trade prospects. External threats, including U.S. tariff risks, continue to temper expectations of significant sales growth driven by new products or policies.

Labor market conditions also weakened, with staffing levels declining for a fourth consecutive month, though the rate of job cuts was slower than in November. Additionally, manufacturers reduced selling prices for the first time since September, even as input costs rose. Companies cited efforts to support sales by absorbing higher costs and lowering prices, including export charges.

Wang Zhe, an economist at Caixin Insight Group, emphasized the need for proactive and flexible policy measures to address the increasingly complex external environment. He called for initiatives to improve household incomes and livelihoods, underscoring the importance of robust domestic consumption as a counterbalance to external economic pressures.

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