A Chinese worker in a textile factory in Nanping city in Southeast China's Fujian province. Photo: AFP

China’s manufacturing sector continues to purr along despite escalating costs and the threat of a trade war with the United States. On Friday, the eagerly awaited Caixin-IHS Markit General Manufacturing Purchasing Managers’ Index, or PMI, showed last month’s figure of 51.1 remained unchanged from April.

This was down on the official PMI released by China’s National Bureau of Statistics 24 hours earlier, which came in at 51.9, the highest level since October 2017 and an increase of 0.5 compared to April’s number. A figure above 50 indicates an expansion in activity, while a number below signals a contraction.

The disparity can be put down to the nature of the two PMIs. The official one focuses on larger companies and state-owned enterprises, while the readings from Caixin-IHS Markit are from small and medium-sized firms mainly involved in the export market.

“Even though the May survey pointed to just a modest expansion of China’s manufacturing sector, production growth and new orders picked up slightly from April,” Caixin and Markit stated in a joint press release. Still, new export sales fell, they added.

It was a different story on Thursday when the official PMI showed solid growth.

Again, this was partially down to strong construction numbers from companies involved in domestic infrastructure projects, which have been a shot in the arm for the slimmed-down steel sector.

Another crucial area has been high-tech manufacturing, where activity jumped to 54.8 last month, up from April’s 53.8, despite pending tariffs as the US trade dispute with China rumbles on.

“It’s been impressive that China has been able to maintain its momentum in spite of the fact that it’s clear that President Xi [Jinping] is delivering on his promise of maybe sacrificing a little bit of economic strength for stability,” Carl Tannenbaum, the chief economist at Northern Trust.

Overall, economists still expect GDP growth to slow to 6.5% this year from 6.9% in 2017, citing rising borrowing costs, tougher limits on industrial pollution and a crackdown on local government spending to check rising debt levels.

As for export orders, some economists suspect that Chinese companies “front-loaded shipments” last month due to deteriorating relations between Washington and Beijing.

Yet analysts were more upbeat. “It’s been impressive that China has been able to maintain its momentum in spite of the fact that it’s clear that President Xi [Jinping] is delivering on his promise of maybe sacrificing a little bit of economic strength for stability,” Carl Tannenbaum, the chief economist at Northern Trust, told CNBC in a reference to financial reforms in the country.

The Caixin-IHS Markit PMI certainly fitted into that scenario as companies continued to trim staffing levels and increase prices in response to escalating costs.

Even though the rate of job cuts accelerated in May from the previous month, manufacturers remained optimistic that output would “increase amid forecasts of rising customer demand and the launch of new products,” the survey showed.

“Respondents widely attributed their higher costs to rising prices for raw materials, such as chemicals, metals and oil,” Caixin and Markit said. “As a result, prices charged for manufactured goods rose at a solid pace that was the fastest in 2018 so far.”

But concerns persist, particularly about the White House’s announcement earlier this week that it would have a final list of US$50 billion-worth of imports that would be subject to 25% tariffs by June 15.

Two weeks later, President Donald Trump’s administration also plans to reveal investment restrictions on Chinese acquisitions of US technology.

“Uncertainties [still remain] for exports,”  said Zhong Zhengsheng, the director of macroeconomic analysis with consultancy CEBM, a subsidiary of Caixin Insight Group. “The situation stems from the increasingly fraught trade relationship between China and the US.”

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