Three Major Economic Signals in China: Manufacturing Slowdown, Services Recovery, Profit Surge

Overview

This report examines three key signals in recent China's macro economy: first, the marginal weakening of manufacturing sector sentiment; second, strong performance of non-manufacturing sector; third, significant growth in industrial profits. It also discloses the national-level five-year urban renewal plan, indicating large-scale fiscal and infrastructure investments in the coming years. Overall, it presents characteristics of structural differentiation.

Core views

According to the latest official data, China's May manufacturing PMI slightly declined from 50.3 in April to 50.0. While still in the expansion zone, momentum has weakened. Goldman Sachs noted that demand in energy processing and chemical fiber industries remains weak, potentially affected by the Iran conflict. Meanwhile, non-manufacturing PMI rose from 49.4 to 50.1, with both services and construction showing improvement. Although construction remains at low levels, signs of stabilization have emerged. In terms of corporate earnings, profits of industrial enterprises above designated size，同比增长26.0% in April, far exceeding revenue growth (5.8%), mainly due to rising commodity prices, particularly the raw material manufacturing sector contributing 10.3 percentage points to profit growth. Additionally, the "15th Five-Year Plan Urban Renewal Plan" released on May 28 first clearly set quantitative targets, covering six major areas including old residential buildings, urban villages, underground pipeline networks, and industrial brownfield sites. Goldman Sachs estimates that full implementation would bring 4-5 trillion RMB in incremental investment, but actual results depend on local fiscal arrangements and incentive mechanisms.

Analysis framework

Goldman Sachs employs a typical macro data cross-validation method: judging structural economic changes through the divergence of manufacturing and non-manufacturing PMI, identifying upstream price transmission effects on profitability through differences between industrial profit and revenue growth rates, and combining policy document interpretation with quantitative estimates to assess potential investment scale. This method emphasizes comprehensive economic trend assessment from three dimensions: price-volume relationships, sector rotation, and policy implementation pathways.

Methodology notes

• Industry Analysis FrameworkSupply-demand framework

  Identifying structural differentiation within the economy by comparing supply-demand performance between manufacturing and non-manufacturing sectors.

  When manufacturing sentiment declines while services recover, it reflects an economic shift from production-driven to services consumption-driven, a typical signal of supply-demand structural rebalancing.

• Cycle and Sentiment FrameworkSentiment Inflection Point Analysis

  Monitoring whether indicators break through critical values (such as 50) and continuous change trends.

  PMI above 50 indicates expansion, below 50 indicates contraction. While 50.0 and 50.1 differ by only 0.1, the directional change can serve as a leading indicator for short-term sentiment turning points.

• Macroeconomic frameworkInventory cycle (Kitchin)

  Commodity price fluctuations are often related to inventory cycles, affecting corporate profits.

  The significant profit improvement in the raw material manufacturing sector coincides with rising global commodity prices, indicating the current inventory replenishment phase, where corporate profitability benefits from price elasticity.

• Macroeconomic Policy AnalysisPolicy-Driven Analysis

  Converting government five-year plans into quantifiable investment expectations.

  By analyzing specific project lists in the "15th Five-Year Plan," the incremental capital scale is estimated, thereby constructing a quantitative model of policy dividends.

Key data

• Manufacturing PMI (May)50.0Decreased by 0.3 month-on-month, still in expansion zone but momentum slowing.
• Non-manufacturing PMI (May)50.1Increased by 0.7 month-on-month, with services and construction activities both rebounding.
• Industrial Profits YoY Growth (April)26.0%Far exceeding revenue growth (5.8%), mainly due to rising commodity prices.
• Raw Material Manufacturing Sector Profit Contribution10.3ppAccounting for 18.2% of total industrial profit growth, the core driver.
• Urban Renewal Plan Expected Incremental InvestmentRMB 4-5tnCompared to the 14th Five-Year Plan, could bring massive new investment if fully implemented.

Impact & implications

The coexistence of slight manufacturing decline and services recovery reflects China's ongoing economic transition from investment and export-driven to domestic demand and services-oriented. While significant industrial profit growth benefits corporate cash flow, it stems more from external commodity price increases rather than endogenous demand recovery. The implementation of urban renewal plans will provide long-term support for construction, building materials, and environmental protection industries, particularly benefiting enterprises with strong local resource integration capabilities. However, the effective advancement of this plan still highly depends on local government financing capacity and fiscal incentive policies, with implementation risks.

Risks

• Local government fiscal pressure constraining the actual implementation speed of urban renewal plans.
• International commodity price volatility may affect the sustainability of industrial profits.
• Further weakening of manufacturing sentiment may drag down the overall economic recovery pace.

What to watch

• Subsequent local government special bond issuance and project commencement progress.
• Commodity price trends, especially changes in crude oil and metal prices.
• Whether manufacturing PMI can stabilize and rebound in the second half of the year.
• Implementation details for various sub-sectors of urban renewal (such as pipe networks, old renovation).