China's factory activity returned to growth in September, offering a modest sign of improvement for the world's second-largest economy as easing weather disruptions and strong demand linked to the global artificial intelligence boom supported industrial production.
The official manufacturing purchasing managers' index (PMI) rose to 50.1 in September from 49.8 in August, moving back above the 50-point threshold that separates expansion from contraction, according to data from China's National Bureau of Statistics. The reading matched the median forecast in a Reuters poll. The improvement ended two consecutive months of contraction.
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Production strengthens, but demand remains uneven
The production sub-index climbed to 51.7 in September from 50.4 in August, while the new orders index stood at 50.5, suggesting that factory output expanded at a faster pace even as domestic demand remained relatively subdued.
The improvement was also reflected in a private-sector survey. The RatingDog manufacturing PMI rose to 52.1 in September, its highest level in five months.
However, the recovery remains uneven. China's smaller manufacturers continued to operate below the expansion threshold, with the official PMI for medium-sized companies at 49.7 and small firms at 48.9. The employment sub-index also remained below 50, pointing to continued weakness in hiring.
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Services and construction also rebound
China's non-manufacturing PMI, covering services and construction, rose to 50.2 in September from 49.0 in August.
Within the sector, the construction index climbed to 50.3, while the services index increased to 50.2. The improvement indicates that activity outside manufacturing also recovered during the month, although the new-orders index remained below 50, highlighting lingering demand constraints.
Stimulus remains important
The latest data come as Beijing has stepped up targeted measures to support economic activity. China announced measures on Tuesday aimed at directing cheaper credit toward infrastructure, technology and other sectors, while also expanding support for home buyers.
Reuters reported that policymakers face pressure to provide further assistance as weak retail spending, investment and the prolonged property downturn continue to weigh on the economy.
China has increasingly relied on manufacturing and exports to support growth as domestic demand remains weak. The country's trade surplus is on track to exceed $1 trillion for a second consecutive year, although geopolitical tensions and trade restrictions remain risks for exporters.
US-China trade tensions remain a risk
The outlook for Chinese exporters remains complicated by trade friction with the United States and other major markets.
China and the United States agreed this week to pursue tariff reductions on $60 billion worth of goods traded between the two countries. However, several important products were excluded from the arrangement, leaving uncertainty over the broader outlook for bilateral trade.
For Chinese manufacturers, sustained overseas demand could help offset weak domestic consumption, but higher trade barriers could put pressure on export volumes and corporate margins.
Impact on stocks
The September PMI data could provide some support to Chinese equities by improving expectations for industrial earnings and economic activity, particularly in manufacturing, technology, infrastructure and export-oriented companies.
Technology and semiconductor-related stocks could benefit from continued investment linked to artificial intelligence, while infrastructure and industrial companies may gain from Beijing's targeted credit-support measures.
A stronger manufacturing reading could also support sentiment toward China's banks and financial companies if investors expect increased lending and economic activity.
However, the relatively modest rise in the official PMI means the data do not by themselves signal a broad-based economic recovery. Weak property activity, subdued household demand, soft employment indicators and trade uncertainty remain important risks for equities.
Chinese stock markets have continued to face pressure despite policy support, with investors focused on whether stimulus measures can translate into stronger domestic demand and corporate earnings.
Broader market implications
The PMI rebound is therefore likely to be viewed as a positive near-term signal for China's industrial economy, but investors may look for further evidence in retail sales, fixed-asset investment, property activity and corporate earnings before concluding that the recovery is becoming more broad-based.
For Asian markets, stronger Chinese factory activity could also benefit companies exposed to Chinese demand, including commodity producers, machinery manufacturers, semiconductor suppliers and other regional exporters. At the same time, stronger Chinese industrial output could increase competition for manufacturers in other export markets.
Overall, September's PMI provides evidence that China's industrial sector regained momentum at the end of the third quarter, while the still-fragile domestic economy keeps pressure on Beijing to sustain policy support.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times.)
