China - January PMIs disappoint

China Macro: Manufacturing PMIs down again, divergence between two surveys remains

China’s PMIs for January published this week and the previous week came in weaker than their December 2024 readings and below consensus expectations. Starting with the industrial sector, the ‘official’ manufacturing PMI published on January 27th, earlier than usual due to the Lunar New Year Break starting on Tuesday January 28th, fell by a full point to 49.1 (December/consensus: 50.1), thus dropping back below the 50 mark separating expansion from contraction. And last Monday, the alternative indicator for manufacturing published by Caixin came in at a four-month low of 50.1 (December: 50.5, consensus: 50.6), slightly above the neutral mark. Looking at the various subcomponents, Caixin’s survey showed a more optimistic picture for most sub-indices (including output, domestic and export orders), with the employment component being a clear exception. In both surveys, the employment component stayed below the neutral mark, but in Caixin’s survey it dropped to a post-pandemic low of 46.2. Input and output price components also remained below the neutral mark, confirming the picture of ongoing low inflation (and producer price deflation) as a reflection of weak domestic demand.

Services and composite PMIs also down, still in expansion territory

On the services side, the official non-manufacturing PMI (including services and construction sectors) fell back to 50.2 in January (December/consensus: 52.2). This was similar to the levels seen in the period June-November 2024. The deterioration in January was led by the construction sub-index, which fell back by four points to 49.3 after a similar spike in December. Caixin’s services PMI published this morning also weakened, to 51.0 (December: 52.2, consensus: 52.4). All in all, the official composite PMI (a weighted average of the output components in the manufacturing and non-manufacturing surveys) fell back by more than two points to 50.1, close to the neutral mark and the weakest reading in two years. Caixin’s composite PMI also dropped, but much more marginally (by 0.3 points to a four-month low of 51.1).

PMIs confirm headwinds, more support expected (partly to offset impact from US tariffs)

All in all, the January PMIs do not match the picture of improving survey and activity data seen at the end of 2024. Perhaps as a note of caution, due to (the timing of the) Lunar New Year break China’s monthly data tend to show quite some volatility at the start of each calendar year. Notwithstanding this, the PMIs do confirm that the Chinese economy still faces a number of headwinds. The start of a new tariff war with the US this week brings even more headwinds, although the 10% import tariffs imposed by the US (and directly retaliated by China) are not a gamechanger in terms of our growth forecasts for China at the moment (see for more background our comments on the start of the US-China tariff war 2.0 and US tariff policy more broadly here and here). Note that in our base case we already anticipate a more material stepping up of tariffs to an average effective tariff rate of 45% per Q2-2026 (from around 20% currently, if we include the new 10% tariffs announced this week). That said, there are obviously risks of a further escalation, and a new tariff war may have broader effects on sentiment and confidence as well. All in all, we still expect a further stepping up of monetary easing and stepwise fiscal support, partly contingent on the impact from higher US import tariffs.