China Economy:PMI signals temporary improvement

CMB International Global Markets | Equity Research | EconomicPerspectives China Economy PMI signals temporary improvement Frank Liu(852) 3761 8957frankliu@cmbi.com.hk China’s manufacturing PMI rebounded in December after several months ofweakness,but the recovery remained fragile due to favorable seasonality.Demand showed a tentative improvement asnew orders expanded, and exportorders moved closer to the expansion threshold. Deflation pressure continued toease, with raw material purchase prices staying firmly in expansion and ex-factoryprices further rebounding, reflecting the ongoing policy effort to curb involution-driven price competition. Service PMI remained in contraction while constructionPMI rebounded. We expect growth to remain under pressure in early 2026, whichmight trigger a new round of policy stimulus towards property and consumption.Looking forward, we expect a 50bp cut in RRR and a 10bp cutin LPR in 1Q26,followed by an additional 10bp LPR cut in 3Q26, while broad fiscal deficit shouldremain almost flat at 8.5% in 2026. We expectthatfull-year GDP growth rate maydecline from 5% in 2025 to 4.8% in 2026. Bingnan YE, Ph.D(852) 3761 8967frankliu@cmbi.com.hk Manufacturing PMI rebounded modestly.Manufacturing PMI edged up to50.1% in December from 49.2% in November, returning to expansion andbeating market expectationsat 49.6%.A later Chinese New Year typicallyimplies more favorable seasonal dynamics for December with less impact oneconomicactivities.Demand conditions improved as the new order index roseto 50.8%in Decemberfrom 49.2%, while new export orders climbed to 49.0%from47.6%,signaling a slowdown in contraction.Production furtherstrengthened, rising to51.7% from 50.0%, indicating supply-side resilience.Deflation pressure continued to ease as raw material purchase prices stayedelevated at 53.1%in December, while ex-factory prices rebounded to 48.9%from 48.2%, consistent with policy efforts to curb disorderly price competitionin upstream sectors. The improvement in price indicators suggests ongoingstabilization in PPI momentum. Import demand stayed weak, and inventoryindicators remained subdued, highlighting cautious corporate behavior. Source: NBS, CMBIGM Non-manufacturing PMIrecovered.Non-manufacturing activityrecoveredinDecember,with easing service momentum and rebounding constructionactivities. Service PMI edged up but remained in contraction at 49.7%, withimprovingactivity expectations.Service price contracted to 48.1%inDecember, while employment remained subdued at 47%.Business activityindicesfor telecommunications,broadcasting and satellite transmissionservices, monetary and financial services, and capital market services allremained in a high-prosperity zone above 60.0%, while those for retail andcatering stayed below the expansion threshold.Construction rebounded to52.8% in Dec from 49.6%, indicating the improvingfixed assetinvestmentfollowing the CEWC. PMI points to atemporary improvementheading into 2026.The DecemberPMI suggests the economy stabilized toward year-end, supported by supply-side resilience andrecoveringconstructionactivities, butit might be largelydriven by seasonal factors. External demand continued to face headwinds asexport momentum slowed, while the marginal effects of earlier policy supportto consumption and property faded. We expect growth to remain underpressure in early 2026,which might trigger a new round of policy stimulustowards property and consumption.Looking forward, we expect a 50bp cut inRRR and a 10bp cut in LPR in 1Q26, followed by an additional 10bp LPR cutin 3Q26, while broad fiscal deficit should remain almost flat at 8.5% in 2026.We expectthatfull-year GDP growth rate may decline from 5% in 2025 to4.8% in 2026. Source:Wind, CMBIGM Source:Wind, CMBIGM Source:Wind, CMBIGM Source:Wind, CMBIGM Source:Wind, CMBIGM Source:Wind, CMBIGM Source:Wind, CMBIGM Source:Wind, CMBIGM Source:Wind, CMBIGM Source:Wind, CMBIGM Source:Wind, CMBIGM Source:Wind, CMBIGM Source:Wind, CMBIGM Source:Wind, CMBIGM Disclosures& Disclaimers Analyst CertificationThe research analyst who is primary responsible for thecontent of this research report, in whole or in part, certifies that with respect to the securities or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject securitiesor issuer; and (2)no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by that analyst in this report.Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and FuturesCommission) (1) have dealt in or traded in the stock(s) covered in this research report within 30 calendar days prior to thedate of issue of this report; (2) willdeal in or tradein the stock(s) covered in this research report 3 business days after the date of issue of