The latest data from the National Bureau of Statistics shows that the manufacturing PMI in May precisely fell at the 50.0% threshold for the expansion-bust threshold.

On the surface, it appears calm, but beneath the surface, there are hidden currents. As the previous sharp fluctuations in international oil prices gradually faded, the real supply and demand picture began to emerge: price indicators fell significantly, and the short-term "cost-performance dividend" for exports was cooling down.

In this "critical test," although non-manufacturing provides some support, whether manufacturing itself can move from "critical" to "expansion" still requires precise policy support.

| Weak Demand: New Orders Decline and Inventory Signals as a 'Cautious Signal'

Looking into the root causes of the slight PMI decline, the biggest drag comes from the demand side.

In May, the new orders index fell into contraction territory (49.9%), which was both due to seasonal reductions in May Day working days and a "lingering effect" after earlier price increases—in March, manufacturers stocked up in advance due to price hike expectations and exhausted some demand, but now the surge and pullback, combined with slow terminal recovery, have led to insufficient orders.

Inventory behavior further reveals the cautious mindset of companies.

May showed a combination of "declining raw material inventories and rising finished goods inventories." This means companies are reluctant to increase raw material reserves (lacking confidence in subsequent demand) and face pressure from a backlog of finished products (slowing sales).

This "one down, one rise" signal reflects that micro-level players are becoming especially cautious about expansion.

| Resilient production: The pressure of the industrial chain and the "ice and fire" of large and small enterprises

In stark contrast to the weak demand side, the production side still shows strong resilience.

The production index in May slightly declined to 51.2%, remaining in expansion territory for three consecutive months. This reflects that, supported by growth stabilization policies, China's industrial chain operating efficiency is less affected by external disturbances, and manufacturing production execution capability remains intact.

However, it is important to note that the differentiation between companies is intensifying.

The PMI for large enterprises rebounded against the trend to 51.1%, mainly due to the implementation of investment stabilization policies and the concentration of export orders; Meanwhile, the PMI for small and medium-sized enterprises both fell back into contraction territory (48.6% and 48.5%, respectively).

This indicates that under the dual pressure of poor cost transmission and insufficient demand, the survival environment for small and micro enterprises remains relatively fragile

| Prices and Exports: Imported inflation cools, external demand logic returns to fundamentals

Indicators that were previously heavily disturbed by imported factors such as international oil prices are gradually returning to a rational center. First, both major price indices "cooled down"—the raw material purchase price index and the factory price index both fell sharply by 3.2 percentage points.

Although upstream cost pressures have eased somewhat, the price gap between the two remains large, and the profit margins of midstream and downstream companies are still under pressure.

Meanwhile, the new export orders index, which had previously strengthened against the trend alongside soaring oil prices, also fell in tandem.

Previously, Chinese manufacturing used its complete industrial chain to cushion the impact of crude oil, demonstrating strong "cost-performance" amid global inflation; Now, as oil prices stabilize, this short-term export dividend naturally fades, and the logic of external demand is returning to the true warmth and chill of global fundamentals.

| Non-manufacturing Sector Takes the Stage: Dual Drivers of Accelerated Infrastructure and Holiday Consumption

On the non-manufacturing side, the economy has shown a unique endogenous resilience.

In the construction sector, despite facing fewer workdays and adverse effects from extreme weather such as heavy rains in central and southern China and high temperatures in North China, the construction PMI broke with convention and actually rose (rising to 48.8%), which may indicate that policy efforts to stabilize investment in areas such as the "Six Networks" and urban renewal are accelerating in the real economy.

In terms of services, it benefited entirely from the booming cultural and tourism consumption during the May Day Golden Week. The services PMI successfully jumped 0.7 percentage points to 50.3%, returning above the threshold. The high prosperity of industries such as railway transportation, scenic area services, and catering has become the most striking testament to the current consumer market.

Kingtech Perspective | Focusing on "Physical Workload"

The manufacturing sector remains prominent, with strong supply and weak demand, and relying solely on market spontaneous recovery is relatively slow. Future macro policies will become more proactive and effective, especially government public goods investment (such as the "Six Networks" and urban renewal), which will become key drivers for driving enterprise orders and employment.

Large enterprises and new energy sectors (high-tech manufacturing, equipment manufacturing) maintained good resilience, while small and medium-sized enterprises and traditional energy-consuming industries were under significant pressure. The investment logic needs to closely follow the two main threads of "the strong get stronger" and "policy support."

As the raw material purchase price index retreats from its highs, cost pressures in midstream and downstream manufacturing sectors are expected to marginally improve, and some squeezed profit margins may enter a window of recovery.

Focus 1: Infrastructure chain and "Six Networks" related targets

With the arrival of the peak in ultra-long-term special government bond issuance and the introduction of new policy-based financial instruments, focus is on leading central and state-owned enterprises with order acquisition advantages in infrastructure fields such as water conservancy pipelines, urban underground pipelines, and new power grids.

Focus 2: Resilient new quality productive forces directions

Despite overall weak demand, high-tech manufacturing and equipment manufacturing sectors have maintained strong prosperity. It is recommended to focus on growth-oriented enterprises with core competitiveness in high value-added fields such as artificial intelligence, high-end equipment, and new energy.

The May PMI data is a "mixed report." The positive news is the strong resilience shown by the production and non-manufacturing sectors, while the concern is that the foundation for domestic demand recovery still needs to be consolidated, especially the vitality of small and medium-sized enterprises that urgently needs to be reinforced.

In the long term, as policy dividends continue to be released and new drivers are nurtured more rapidly, China's economic trend toward stability and renewal will not change. For investors, rather than getting caught up in minor index fluctuations, it is better to focus on high-quality tracks that truly benefit from industrial upgrading and policy support.