China Economy:PMI notably beat market expectation

China Economy PMI notably beat market expectation Frank Liu(852) 3761 8957frankliu@cmbi.com.hk China’s manufacturing PMI sharply rebounded in Mar partly distorted by thelater and longer CNY holiday in 2026, as the 3M MA remained in contraction.Demand and production both improved, while inventory cycle,andexport andimportorders recovered. Deflation pressure notably eased as raw materialspurchase price and ex-factory price rose to 5-year highs, driven by surgingenergy prices.Non-manufacturing PMI edged up,with services back inexpansion while construction remained in contraction. Price indexes of bothmanufacturing and service sectors indicated the cost-push reflation may leadto a positive PPI in upcoming months, supporting a rebound in industrial profitsparticularly in upstream sectors. However, downstream firms’ pricing powerremains limited and margin pressure may persist as final consumer demandremainssoft.In our view, the rising price level does not mean a broad-basedrecovery in domestic demand or aclearend to China’s deflation cycle yet, butit does mark an encouraging first step towards reflation. We are revisingQ1GDP forecast to 4.8% from 4.5%, mainly driven by expanding trade surplus.Rising price level may push the PBOC rate cut from 2Q26 to 3Q26, in our view. Manufacturing PMInotably reboundeddriven by seasonal distortions.Manufacturing PMIrecovered to50.4% inMarfrom49% inFeb,beatingmarket expectationat 49.9%. The sharp rebound in Mar was likely distortedby the later and longerCNY holiday in 2026, as Feb PMI undershotexpectations.The 3-month moving average remained in contraction,edging up slightly from 49.5%to 49.6%in Mar.Demand and productionboth improved, as new order index and production index surged to 51.6%and 51.4% in Mar from 48.6% and 49.6%.Reflation continuedas rawmaterials purchase price and ex-factory price further expanded to 63.9%and 55.4%, the largest expansion in 5 years driven by surging energyprices. Export and import order narrowed their contraction in Mar, whileemployment index remained subdued tat 48.6%.Breaking down by sector,food processing, smelting and pressing of non-ferrous metalsexpandedinboth new orders and production, while textile & garment, chemical fiber andrubber & plasticnotablecontracted. Non-manufacturing PMIedged up, with services back in expansion.Non-manufacturing PMI edged up to50.1% inMarfrom 49.5%,beatingmarket expectation at49.9%. Service PMIrose to 50.2% in Mar driven byrising price index of input and final sales, whilenew order indexfurthercontractedto 45.3%.Breaking down by sector,railway transport,telecommunications& broadcasting, monetary, financial and insuranceservicesremained in high prosperity; whileretail and lodging & diningcontracted. Construction PMIinched up from 48.2% to 49.3% in Mar,indicating a slower pace of contraction. Surging price indexes signaled easing deflation pressure.Priceindexes of both manufacturing and service sectors indicated the cost-pushreflation may lead to a positive PPI in the next few months.Higher energyand rawmaterialcosts are lifting upstream prices and supporting a reboundincorporateprofits as Jan-Feb industrial profits rose 15.2% YoY with stronggains in electronics and non-ferrous metals. However, downstream firms’pricing power remains limited and margin pressure may persist as finalconsumer demand remainssoft. The rising price level does not mean abroad-based recovery in domestic demand or a clear end to China’sdeflation cycle yet, but it does mark an encouraging first step towardsreflation alongside improving corporate profits. We are revisingQ1 GDPforecast to 4.8%from 4.5%, mainly driven by expanding trade surplus. 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 of this research report, in whole or inpart, 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 the code of conduct issued by The HongKong 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 report3 business days after the date of issue of this report; (3) serve as an officer of any of the HongKong listed