China’s Factory Activity Expands Amid Trade Tensions

BEIJING (Reuters) – China’s factory activity likely expanded for a fourth month in January, underscoring the supply-side strength of the world’s No.2 economy, which is bracing for U.S. tariff hikes that could further weaken domestic demand and fuel deflationary pressures.

A Reuters poll of 18 economists forecast the official purchasing managers’ index (PMI) remained at 50.1, matching December’s reading and staying above the 50-point threshold that separates growth from contraction in activity.

China’s $18 trillion economy hit the government’s growth target of “around 5%” over 2024 but in a lopsided fashion, with exports and industrial output far outpacing retail sales and a persistently elevated unemployment rate.

U.S. President Donald Trump’s threat to impose a 10% punitive duty on Chinese imports on Feb. 1 aims to pressure Beijing to take stronger action on trafficking of fentanyl’s chemical precursors, revealing how reliant China’s economy is on exports for growth.

China’s trade surplus reached almost $1 trillion last year as producers sought to shift stocks overseas to counter weak domestic demand. The country’s outbound shipments were supported by factory gate deflation and a weak yuan, making Chinese goods more competitive in global markets.

However, at home, falling prices have negatively impacted corporate profits and workers’ incomes.

Policymakers have pledged to roll out further stimulus over 2025, but analysts worry it will stay focused on industrial upgrades and infrastructure rather than households, potentially worsening factory overcapacity, weakening consumption, and increasing deflationary pressures.

Beijing has pledged to prioritize revitalizing domestic demand, but has announced little apart from a recently expanded trade-in program that subsidizes purchases of cars, appliances, and other goods.

Chinese leaders also hope that policy support measures implemented late last year will stimulate demand in the struggling property sector and ease financial hardships for developers, significantly impacting domestic demand and local government finances.

Increasing consumer spending would reduce producers’ exposure to Trump’s tariff threats, which he suggested on the campaign trail could be as high as 60%.

Analysts polled by Reuters forecast that the private sector Caixin PMI remained at 50.5, with data to be released on Feb. 3.