China's manufacturing section recorded its strongest quarterly performance since late 2020, although growth eases marginally in June, indicating that factory activity remains resilient even as broader economic conditions remain fragile.

The RatingDog China Manufacturing Purchasing Managers' Index (PMI) edged down to 51.7 in June to 51.8 in May. While the reading fell short of market expectations, the average PMI for April-June quarter stood at 51.9, the highest since the fourth quarter of 2020.

A PMI reading above 50 indicates an expansion in manufacturing activity from the previous month.

"The manufacturing sector maintained a steady expansion in June, supported by sustained new order growth, easing cost pressures and improved labour market conditions," Yao Yu, founder of RatingDog, said in a statement.

Exports and AI continue to support factory activity

New orders rose for a 13th consecutive month, matching the longest streak recorded in 2021 and the strongest run since 2018. At the same time, input-cost inflation eased to a five-month low, reducing cost pressures for manufacturers.

Despite the improvement in factory activity, economists cautioned that manufacturing strength may not be sufficient to offset weakness in the wider economy. Retail sales and investment both declined in May at rates not seen since the pandemic, raising concerns over economic momentum in the second quarter.

Julian Evans-Pritchard, Head of China economics at Capital Economics, said the recent improvement in manufacturing "has been heavily dependent on exports and AI-related tech."

The private RatingDog survey has generally indicated stronger manufacturing conditions than China's official PMI over the past year, reflecting the resilience of exports. The survey is considered to be more representative of smaller and export-oriented manufacturers.

Henry Hao, senior economist at Commerzbank AG in Singapore, said the divergence between the private and official surveys points to "a two-speed manufacturing activity".

"Strategic tech sectors are booming, but traditional exporters are feeling the pinch from cooling global demand amid the conflict in the Middle East," Hao said.

Trade risks remain

China's reliance on exports and AI-related manufacturing faces growing external risks as major trading partners consider measures to address trade imbalances.

The United States has maintained elevated tariffs on Chinese goods, despite an improvement in bilateral ties following a meeting in May between US President Donald Trump and Chinese President Xi Jinping. The tariffs continue to weigh on Chinese exports to the US market.

Trade tensions with the European Union also remain unresolved. On Monday, the two sides agreed to work towards progress on trade disputes by October, following talks in Brussels between EU Trade Commissioner Maroš Šefčovič and Chinese Commerce Minister Wang Wentao.

Elsewhere in Asia, manufacturing activity remained in expansion territory across several economies. Taiwan recorded a PMI of 55.2 in June, South Korea posted 52.1, while Japan's reading rose to 54.8. Indonesia was the exception, with its PMI falling to a one-year low of 46.9 as higher inflation increased manufacturing costs and weakened consumer demand.