China's September PMI reveals mixed signals for equity traders

China's latest PMI data

Both official and private surveys released September's purchasing managers' index (PMI) results yesterday, revealing diverging sectoral performances. Manufacturing activity strengthened while services momentum moderated, creating a complex picture for market participants.

These figures matter for traders because they provide insights into economic momentum. PMI readings above 50 indicate expansion, while figures below 50 signal contraction across the surveyed sector.

The private RatingDog manufacturing PMI rose to 51.2, beating consensus expectations, while the official National Bureau of Statistics (NBS) data showed manufacturing PMI improved to 49.8, though it remains in contraction territory for the sixth consecutive month.

Services activity moderated, with the RatingDog services PMI easing to 52.9. The official non-manufacturing PMI also declined to 50.0.

Private RatingDog PMI data

• Manufacturing PMI: 51.2 (prior: 50.5, consensus: 50.2)
• Services PMI: 52.9 (prior: 53.0)

Official NBS PMI data

• Manufacturing PMI: 49.8 (prior: 49.4, consensus: 49.6)
• Non-manufacturing PMI: 50.0 (prior: 50.3)

Figure 1: China PMI data

How to interpret the diverging trends

The discrepancy between official NBS and private RatingDog surveys reflects different sampling methodologies. However, both reveal a consistent pattern: manufacturing activity is improving whilst services momentum has moderated.

Manufacturing activity strengthened notably, recording its strongest expansion in new business orders since February according to the RatingDog survey. This improvement likely stems from overseas buyers accelerating shipments ahead of the approaching US-China trade truce deadline.

Meanwhile, services activity moderated in both surveys, reflecting further contraction in employment.

Figure 2: RatingDog manufacturing PMI price trend

The concerning dynamic is the continued squeeze on corporate profitability. Output price deflation persists despite government efforts to discourage disorderly price competition, while input costs have risen across both manufacturing and services sectors, potentially due to Beijing's policies to reduce excessive capacity. This combination puts immense pressure on corporate margins.

Property market challenges persist

The real estate sector shows little signs of recovery, presenting a significant drag on economic growth. Housing prices continued to fall in August across both new homes and secondary markets.

This decline persists despite central government intervention, including lifting caps on the number of homes each family can purchase in top cities. Shanghai and Beijing both removed purchase restrictions, whilst the central bank lowered interest rates on personal housing provident fund loans.

The property sector has historically accounted for close to 25% of China's gross domestic product (GDP). Its continued weakness creates substantial headwinds for overall economic growth and related industries including construction materials. Without resolution in the property market, broader economic recovery remains elusive.

Figure 3: China's home prices – month-on-month growth trend

Implications for equity markets

Chinese stock markets face a critical test as economic data delivers mixed messages. The manufacturing recovery provides some support, but corporate profitability pressures and property market weakness create significant headwinds.

The year-to-date rally in the stock market has been largely supported by investor sentiment around consumption growth and the AI boom. Chinese companies listed onshore saw earnings growth of just 1.6% year-on-year in the second quarter, down from 3.7% in the first quarter according to CICC.

Without meaningful improvement in corporate earnings, the sustainability of this rally remains questionable.

Figure 4: A-shares corporate profit year-on-year growth

Looking ahead to October's policy meetings

The macro calendar will be relatively muted in the coming days as China celebrates National Day during the Golden Week holiday. Markets will then turn their attention to the Communist Party's annual conclave scheduled for 20-23 October.

Key leaders will review the next five-year plan during this critical meeting. How Beijing addresses structural problems around deflation and the property sector will prove critical for market direction in the months ahead.

China's target to deliver 5% GDP growth in 2025 adds urgency to these policy discussions. Whilst the first two quarters exceeded the target, many expect the growth rate to moderate in the second half as much of the export demand has been front-loaded.

Policy announcements around stimulus measures, property market support, or corporate tax relief could trigger significant market movements. Traders should prepare for potential volatility around these policy meetings and position accordingly.

The sustainability of the manufacturing recovery also warrants close monitoring. If export demand fades after the trade deadline passes, the sector could quickly return to contraction.