Our most recent quarterly Manufacturing Industry Output (MIO) Tracker indicates US tariffs and uncertainty about global trade have placed a dampener on some of the positive signs for 2025 manufacturing growth worldwide. This led us to revise our global outlook down to 1.1% for 2025. However, China’s manufacturing industry has remained robust and appears to be on a recovery path based on data from the first half of 2025, boosted by rebounding domestic demand. This is despite ongoing tariff pressures and follows slower manufacturing growth in recent years, with a particularly challenging 2024. However, the falling capacity utilization rate has led us to downgrade the outlook for the machinery sector.

The following interview was conducted with Senior Research Analyst Samantha Mou based on the latest quarterly forecasts from the MIO Tracker (a measure of manufacturing performance in monetary terms).

What is the current landscape for Chinese manufacturing?

In the first half of 2025, China’s manufacturing sector continued to demonstrate notable resilience. Despite headwinds from US tariffs, the industry remained on a recovery path.

For analytical purposes, we divide the manufacturing sector into two main categories; manufacturing of end-products (such as automobiles and electronics) and machinery (such as machine tools and materials handling equipment).

Manufacturing continues to dominate, accounting for approximately 95% of China’s total manufacturing output; slightly higher than the global average of 94% in 2024. In contrast, machinery contributed just 5%, compared with 6% globally during the same period.

For full-year 2025, we predict China’s manufacturing output will grow by 2.8%, reflecting a clear rebound from the 2.1% growth recorded in 2024. Within this, manufacturing is expected to expand by 2.9%, while the machinery sector is forecast to grow by a more modest 1.6%.

How has the outlook for Chinese manufacturing changed since the last quarterly MIO update? What do you think are the key factors constraining Chinese manufacturing industry growth at present?

In the latest update to our MIO Tracker, we revised down the growth forecast for China’s machinery sector for 2025-26. The adjustment reflects growing pressure on new equipment demand, driven by the persistently low capacity utilization rates and ongoing supply-side measures aimed at reducing excess capacity. In addition, US tariff policies may influence manufacturers’ decisions on production site locations, potentially discouraging expansion and adding further uncertainty.

Due to these factors, we have revised our 2025 growth forecast for China’s machinery sector downward, from 2.4% to 1.6%. Accordingly, the overall growth forecast for China’s MIO has also been adjusted to 2.8%, slightly below last quarter’s projection of 2.9%.

What impact will capacity reduction plans have on growth?

Key industries such as steel, aggregates, solar panels, and EV batteries continue to operate at low capacity utilization levels. This has prompted capacity reduction plans across these sectors. As a result, investment momentum is expected to soften over the coming quarters.

Investment indicators closely tied to machinery demand have begun to show signs of weakness. In June 2025, China’s fixed asset investment grew by just 2.8% year-on-year, marking the slowest pace since 2021.

While the ongoing slump in the real estate sector was a major drag (with property investment down 11.2% in H1), manufacturing investment also slowed down. Manufacturing investment growth rates declined from 9.1% in Q1 2025 to 7.5% in Q2. Notably, investment in the electrical machinery and equipment manufacturing sector declined by 7.8%, reflecting softening investment even in previously resilient segments.

How real a threat does robust growth in Asian markets such as India, Singapore, South Korea and Taiwan pose to China?

Due to geopolitical uncertainties, there are broader shifts in global supply chains. International manufacturers have a desire to diversify production activities beyond China. For example, companies like Apple are accelerating investment in India. Meanwhile manufacturers from South Korea and Taiwan are well positioned to benefit from US investments in semiconductors and datacenter infrastructure. In addition to these regions, Southeast Asian countries are also emerging as key beneficiaries of this diversification, attracting increased foreign direct investment and manufacturing activity.

However, this trend does not necessarily represent a zero-sum loss for China. In many cases, manufacturing hubs in these regions continue to import Chinese materials, components and machinery, reinforcing China’s role in the broader regional supply chain. Rising automation demands in Southeast Asia, for example, are driving increased exports of Chinese machinery.

While China’s exports to the US declined by over 10% in the first half of 2025, its exports to ASEAN and India grew by 13% and 14% respectively. This indicates a reorientation rather than an overall reduction in trade. In this context, the growth of regional players presents both competitive pressure and complementary opportunities for China’s export economy.

What is the longer-term outlook for Chinese manufacturing as a whole and the machinery market in particular?

Overall, China’s manufacturing sector remains on a recovery trajectory, although supply-side challenges and external pressures from tariffs should not be ignored. With domestic demand yet to fully rebound, manufacturer profits under pressure, and excess capacity still unresolved, a full recovery in the machinery sector is likely to take more time to materialize.

That said, ongoing supply-side capacity reduction plans are combined with gradually improving domestic demand that is supported by government spending. We expect this to help ease overcapacity and competitive pressures over the coming quarters.

Looking ahead to 2026, China’s MIO is projected to grow by 3.6%, reflecting a return to a steady growth path. While the machinery sector may continue to face short-term headwinds, medium- to long-term prospects remain positive. Structural trends, such as rising demand for automation, technological advancements, and growing export demand, particularly from neighboring countries, are expected to support machinery sector growth outpacing that of manufacturing beyond 2027.

Interact Analysis’ Manufacturing Industry Output (MIO) Tracker forecasts out to 2029 and covers a total of 45 countries, across 72 manufacturing end user sectors, 30 machinery sectors and two points in the supply chain (machinery and manufacturing end-users). To learn more, get in touch with Samantha Mou directly: samantha.mou@interactanalysis.com.