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Key Points:
- January official PMIs were a disappointment. Manufacturing PMI reading unexpectedly fell below the 50 level to 49.3, after briefly returning to expansion territory in December. Non-manufacturing PMI reading also turned contractionary at 49.4 vs 50.2 prior, dragged by construction sector (48.8 vs 52.8 prior) and a slightly more contractionary services PMI (49.5 vs 49.7 prior).
- Even factoring in CNY seasonality, it showed a more-than-average PMI pullback in January from December for manufacturing (-0.8ppts vs -0.2ppts) and construction (-4.0ppts vs -1.5ppts) in recent comparable years (CNY in February).
- Steep decline in new orders dragged manufacturing PMI, declining by 1.6ppts to 49.2. New export orders sub-index reading also dropped but by a lesser extent of -1.2ppts to 47.8, which suggests a weaker domestic demand relative to external one. The production sub-index also declined but it remained expansionary at 50.6. The manufacturing production and business expectation dropped sharply from December to still expansionary 52.6 reading, nevertheless reflecting a less optimistic view of manufacturers.
- The bright spot however lies on manufacturing PMI price-related sub-indices, with input price (i.e., main raw material purchasing price index) rising further to 56.1 and output price posted an expansionary reading for the first time since June 2024 at 50.6. The improvements are likely more reflective of the recent increase in commodity prices, than the consumer end-demand recovery.
- A sharply weaker construction PMI was partly linked to cold weather and pre-CNY seasonality according to NBS officials. Indeed, the high-frequency indicators we tracked such as weekly cement shipment rate and rebar consumption showed lukewarm activities in January as their levels were either equal to or lower than previous comparable years (CNY in February) for the same periods. Looking back at Oct-Dec period, there were absence of noticeable improvement in cement shipment/ rebar consumption either, which suggests a more gradual rollout of two “RMB 500bn” stimulus that helps support project construction. More worrying is the forward-looking indicator construction PMI business expectation sub-index, posted the first contractionary reading since Covid-19 at 49.8. This came after significant reading improvement in previous three months to above 56-level, which was likely linked to the series of pro-investment policy announcement in Q4 (e.g., two “RMB 500bn” stimulus).
- Housing market saw better performance in transactions for secondary homes than new homes according to the high frequency indicators we tracked. For January period (i.e., 4 full weeks), the secondary residential units sold in 8 cities we tracked totalled 56k, which is higher than 2021-2025 average of 44k and matches last year’s level of 59k. The comparison to last year’s level matters as it was when the housing prices decline narrowed and stabilized following Sep 2024 major housing policy easing that initially stimulated the increase in transactions. A temporary price stabilization may also happen this time. On the other hand, commodity residential units sold in 17 cities totalled only 36k for the same period, much less than 2021-2025 average of 84k and last year’s 63k level.
- The improvement in secondary homes sale may be partly attributed to the favourable tax policies introduced lately, namely the policy extension (until 2027) on the refund of individual income tax paid when selling old houses if the individual purchases a new home within a year; and lowering the secondary home transaction cost through reducing the value‑added tax on selling homes held for less than two years from 5% to 3%. In theory, this should unlock some demand for new homes albeit modest in a later stage, but a sustainable home demand will still rely on wages and employment prospects, and housing price stabilization.
- Further easing likely on the way. In upcoming March NPC, we expect the budgeted fiscal deficit-to-GDP ratio to nudge higher to 4.5% and that the “broad” fiscal deficit ratio to increase from 8.4% previously to 9.0%. Monetary wise, we think a cut on policy rate (-10bps) and RRR (-50bps) is likely by Q1 if domestic growth fails to pick up.
