In September, China’s manufacturing sector contracted for the sixth consecutive month according to an official report released on Tuesday, indicating that manufacturers are waiting for more stimulus to enhance domestic demand and clarity on a U.S. trade agreement.
The official purchasing managers’ index (PMI) rose to 49.8 in September from 49.4 in August, a six-month high. Although it remained below the 50 threshold that separates growth from contraction, it exceeded the median forecast of 49.6 from a Reuters poll.
This ongoing decline highlights the dual challenges facing China’s economy: domestic demand hasn’t achieved a lasting recovery post-pandemic, and U.S. tariffs under President Donald Trump have put pressure on Chinese and foreign factories that buy components.
However, a separate private-sector survey of factory managers revealed the fastest expansion since March, driven by a rise in new orders and increased production, including a surge in export orders.
The two surveys target different producer groups. The National Bureau of Statistics (NBS) focuses more on large and medium-sized firms catering to domestic markets, while the RatingDog General PMI, compiled by SP Global and rising to 51.2 from 50.5 in August, includes more export-oriented private companies.
“The rebound reflects a seasonal increase as summer disruptions have passed and government support grows,” said Xu Tianchen, senior economist at the Economist Intelligence Unit, about the official PMI’s main figure.
Xu added that China’s economic momentum is characterized by fluctuations: a strong first quarter from early stimulus, a slower midyear, and a fourth-quarter rebound as government support measures increase to hit growth targets.
Markets remained stable after the data release, focusing on policymakers’ plans for near-term stimulus and an October Communist Party meeting to outline the next five years of China’s social and economic strategy.
Policymakers announced a series of consumer loan subsidies in mid-August, a move validated by separate data on factory output and retail sales for that month, which showed the weakest growth in 12 months.
Pan Gongsheng, governor of the People’s Bank of China, mentioned last week that a variety of monetary policy tools are still available to support the economy, but did not follow the U.S. Federal Reserve with a rate cut, as some economists speculated might happen.
Despite signs of slowing momentum in the $19 trillion economy, authorities are not rushing to implement major stimulus measures, given strong exports and a stock market rally, according to market analysts.
Adding to slowdown signs, the official non-manufacturing PMI, covering services and construction, dropped to 50.0 from 50.3 in August, its lowest since November, according to the NBS.
The NBS composite PMI for manufacturing and non-manufacturing was 50.6 in September, compared to 50.5 in August.
“Data on third-quarter economic activity and inflation released so far suggest a strong case for additional policy support in the coming months,” said Lynn Song, chief economist for Greater China at ING, predicting a 10-basis-point rate cut and a 50-basis-point reduction in bank reserve requirements by the year’s end.
The new export orders sub-index contracted for the seventeenth month in a row, while employment and factory gate prices remained stagnant.
Xu from the EIU noted that the combination of strong export performance and weak new orders implies growth is concentrated in a few companies, making the PMI a less reliable indicator of China’s overall export strength.
China’s exports to India reached an all-time high in August, according to customs data, and shipments to Africa and Southeast Asia are set for annual records.
However, no other country matches the U.S. in consumption power, where Chinese producers sell over $400 billion in goods annually, accounting for about 14% of total exports.
Chinese leader Xi Jinping called Trump on September 19 for the first time in three months. While the call seemed to ease tensions, it’s unclear if it resulted in the expected agreement on the popular short-video app TikTok, which analysts view as crucial to a broader trade deal.
Technical disagreements appeared to be hindering negotiations as Chinese and U.S. trade officials met again last Thursday to revisit issues discussed before this month’s Madrid summit, where a TikTok framework deal was reached.
Zichun Huang, a China economist at Capital Economics, is “skeptical that economic growth is on the verge of a sustained rebound.”
“Overcapacity remains an issue, and declining output price components suggest entrenched deflationary pressures,” she said.
