China Manufacturing PMI Quarterly (No. 64)

PMI1Q26Recovery after early slump in the Helen Chinhelenchin@ust.hk PMI points torecovery after early slump inthe manufacturing sector in1Q26 Helen Chinhelenchin@ust.hk William Kongwilliamkong@ust.hk Our observations •Large enterprisesareexperiencingfaster growth,while small and medium enterprisescontinue to contract, albeitat a slower pace.•Manufacturing outputhasbegun toexpand again.•Overall market demandis recovering. HKUST Li & FungSupply Chain InstituteLSK Business BuildingThe Hong Kong University of Policy outlook •TheGovernment Work Reportreleased in March reiteratedapolicy stancecharacterized by “more proactive and effective macro policies”.•China will continue to implement a more proactive fiscal policyandanappropriately Chen ZhongTao Our forecasts for2Q26 czt@clic.org.cnChina Federation ofLogistics •We projectstable growthinmanufacturing production.Whilehigher crude prices areraising costs for downstream sectors, which hampers industrial capacity utilization,animproving external demandshould benefitexports and industrial production.•HeadlinePMIis likely tohoveraround 50.0.•VAIO growthis expected toreach5.0%-5.5%yoy.•Real GDP growthis projectedat4.8% yoy. IN THIS ISSUE: PMI points torecovery after early slump in the manufacturingsector in1Q26 What the PMI tells us about the performance of enterprises ofdifferent sizes What the PMI tells us about manufacturing production What the PMI tells us about overall market demand What the PMI tells us about upstream and midstream prices What the PMI tells us about manufacturing employment 1. PMI points torecoveryafter early slumpinthe manufacturing sector in1Q26 We project that China’sGDP growth willreach4.8% yoy in2Q26. Thisgrowth will be driven by China’s manufacturing sector in1Q26 Afterfallingto 49.3in Januaryand 49.0 in Februaryas the Chinese New Year holidaysuppressed factory activity, China’s manufacturing PMIincreasedto 50.4in March.Whilepartlyinfluencedby seasonal factors,the return ofthe headline PMIto Followinga slight contraction inFebruary, manufacturing output hassincerecovered,with the output indexclimbingfrom 49.6inFebruaryto 51.4inMarch. Thisgrowthwaspropelledby improved overall market demand, as the new orders indexjumpedfrom Prices of industrial products haveseen an uptick: The ex-factory prices indexhasremainedabovethe critical 50-marksince January,reaching afour-year high of 55.4 inMarch. This increasein product prices wasmainly due toasurgein the prices of Exhibit 2 shows the contributions ofvarioussub-indices to the change in the headlinePMI. Thereboundin the headline PMIin Marchwasprimarilydriven byincreasesinthenew ordersindex(which weighs30% in the computation of the headline PMI) andtheoutputindex(which weighs25%).Among the 12 sub-indices (excluding the suppliers’ Policy outlook IntheGovernment Work Reportreleased in March, the Chinese government set the GDP growth target for 2026at“4.5–5%while striving for better in practice”.The reportreiteratedapolicy stancecharacterized by“more proactive and effective macro policies”that are“moreforward-looking, targeted, and coordinated”.The governmentwill continueto pursue progress while ensuring stability, improve both the quality and performance of As part ofamore proactive fiscal policy, this year’sdeficit-to-GDP ratiois setat“around4%”.Government spending will continue to besubstantial.Fiscal fundswill beusedmore cost-effectively, with priority given to boosting consumption, investing in people, Meanwhile,the Chinese governmentwillmaintainan appropriately accommodativemonetary policy.Promoting steady economic growth and an appropriate rebound inpriceswill bekey considerationsforthemonetary policy.The governmentis committed Looking ahead,we expectthattheChinesegovernmentwillcontinueto providepolicysupportin2Q26, whichwill helpthe economynavigate external challenges andsustain Forecasts for2Q26 Despiteglobal economicuncertaintiesand higher crude pricesstemming fromthe US–Israel war against Iran,we expectsteady growthinChina’s exports and industrialproduction, givenacontinued improvement inexternal demand.Overall, we predict that Exhibit 4 plots the quarterly real GDP growth ratesalongsidethe monthly PMIs sinceApril2021.We project that China’s real GDP growth willreach4.8%yoy in2Q26. PMI = Output x 25% + New Orders x 30% + Stocks of Major Inputs x 10% + Employment x 20% + (100-Suppliers' Delivery Time) x 15% 2.What the PMI tells us about the Large enterprisesexperiencefastergrowth Large enterpriseshaveconsistentlyoutperformedsmall andmedium enterprises,and The PMI of“large enterprises”remained above the critical threshold of 50 throughout1Q26,climbingfrom 50.3 inJanuaryto 51.5inFebruaryandhittinga one-year high of Smalland mediumenterprisesface ongoing challenges In contrast, the PMI of“medium enterprises”fell from 48.7 in January to 47.5 inFebruary, beforebouncingbackto49.0inMarch.Similarly,the PMI of“smallenterprises”declinedfrom 47.4 in January to