PMI weakened amid CNY distortions

China Economy PMI weakened amid CNY distortions Frank Liu(852) 3761 8957frankliu@cmbi.com.hk China’smanufacturing PMI showed broad-based softening in Feb amiddistortions fromtheChinese New Year(CNY). Demand and production bothdeteriorated, with new order index and export index both droppingto a newlow. Nevertheless, reflation continued as raw material and ex-factory pricesremained in expansion.Non-manufacturing PMIremained in contraction, asconstruction sites mostly suspended during CNY.Asoftening property market,weaker durablegoods sales, and slower manufacturing have pointed to fadinggrowthmomentum in early 2026.At tomorrow’s annual NPC meeting,policymakers may keep the broad fiscal deficit at around 8% of GDP, tounderpin the economy, including RMB5.9tn general budget deficit(4% ofGDP), RMB1.3tn ultra-long central government special bonds(0.9%), andRMB4.5tn local government special bonds(3.1%)based on our estimates. The2026 GDP growth target may be lowered to “4.5-5%” compared to “around 5%”in 2025, consistent withthe downward revisions seen in recent local “TwoSessions” targets.Any newly introduced policy language on stabilizing theproperty sector and boosting domestic consumption will be key areas to watch. Manufacturing PMIdropped to another low amid CNY distortions.Manufacturing PMIedged down to49% inFebfrom49.3% inJan,belowmarket expectationsat 49.7%.Demand notably deteriorated, as new orderindex dropped to 48.6% in Feb from 49.2%, the biggest contraction sinceJuly 2023. New export order also declined to 45% in Feb from 47.8%,signaling the headwinds in exports heading into 2026.Production fell backinto contraction at 49.6%. Reflation continuedas raw materials purchaseprice and ex-factory price remained in expansion at 54.8% and 50.6%.Breaking down by sector, food processing and computer & electronicdevicesexpanded in both new orders and production, while textile &garment and autonotablycontracted. Non-manufacturing PMIremained in contraction.Non-manufacturingPMI edged up to 49.5% in Feb from 49.4%, below market expectation at50%.Service PMIedged up to49.7% from 49.5%,while neworder indexdropped to45.7% from47.1%.Price index ofinputandfinal salepicked up,indicatingthe reflation process also sustained in the service sector.Breaking down by sector,activities related to tourism and holidayconsumption remained in high prosperity, including lodging & dining, sports& recreational activities, retailand air transportation; whilecapital marketandreal estatecontracted. Construction PMI dippedfrom48.8% to 48.2%in Febas construction sites mostly suspended during theCNY. Source: NBS, CMBIGM Eyes on the national Two Sessions for additional stimulus.A softeningproperty market, weaker durable goods sales, and slower manufacturinghave pointed to fading growth momentum in early 2026. At tomorrow’sannual NPC meeting, policymakers may keep the broad fiscal deficit ataround 8% of GDP, to underpin the economy, including RMB5.9tn generalbudgetdeficit(4%of GDP),RMB1.3tn ultra-long central governmentspecial bonds(0.9%), and RMB4.5tn local government special bonds(3.1%). Additionalmeasures include RMB500bn of CGSBs for capitalinjections into banks and insurance companies, and RMB2tn in localgovernment debt-swap bonds.The 2026 GDP growth target may belowered to “4.5-5%” compared to “around 5%” in 2025, consistent with thedownward revisions seen in recent local “Two Sessions” targets. 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 the content ofthis 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 securities or 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 thecode 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 trade in the stock(s) covered in this research report 3 business days after the date of issue of this report; (3) serve as an officer of any of the HongKong listed companies covered in this report; and (4) have any financial interests in the Hong Kong listed companies covered in this report. CMBIGM RatingsBUY : Stock with potential return of over 15% over next 12 months: Stock with potential return of +15%