China economy: China’s September PMIs returned to expansion as policy support lifted production and construction

Overview

This Citi macro note assesses China’s September PMI release. It concludes that activity likely reached or is approaching a cyclical bottom as manufacturing and non-manufacturing indicators returned to expansion, but it does not see sufficient evidence of a broad pivot toward domestic demand.

Core views

Citi interprets September’s PMI data as an early sign that China’s economy may be finding a cyclical bottom. Both manufacturing and non-manufacturing activity returned to expansion, with the strongest improvement concentrated in production and construction. The manufacturing PMI rose 0.3ppt from 49.8 in August to 50.1 in September, broadly in line with Citi’s 50.2 forecast and the market’s 50.1 expectation. The improvement was consistent with seasonal patterns and was driven primarily by production rather than a decisive improvement in demand. Within manufacturing, the production sub-index climbed 1.3ppt to 51.7, its highest reading of the year, following a summer slowdown in heavy industry. By contrast, demand remained restrained: the overall new-orders sub-index slipped 0.1ppt to 50.5, new export orders also fell 0.1ppt to 50.0, and imports rose 0.6ppt to a three-month high of 49.2 but remained below the expansion threshold. The report also highlights a K-shaped divergence across firms and sectors. Large-firm PMI stayed expansionary at 50.6, while medium and small firms improved by 0.3ppt and 1.0ppt but remained in contraction at 49.7 and 48.9. High-tech manufacturing remained firmly expansionary at 52.5, whereas energy-intensive manufacturing stayed in contraction at 48.0. Price pressures strengthened sharply. The purchasing-price index surged 4.2ppt to 60.8 and the producer-price index rose 3.6ppt to 54.0. Citi attributes the synchronized rise in input and output prices to higher global commodity prices and stronger demand from industries, viewing it as another supply-driven inflationary impulse. Non-manufacturing activity also improved. The non-manufacturing PMI rose 1.2ppt to a three-month high of 50.2, exceeding the market expectation of 49.2. Construction PMI increased 3.4ppt to 50.3, returning to expansion after eight consecutive months below 50. Citi links this recovery to faster deployment of the RMB800bn policy-financing tool and expanding investment support under the “six networks” initiative. Services PMI likewise rose to 50.2 after remaining at 49.3 in each of the prior two months, aided by a normalization of broader commercial activity after the summer holiday period. Citi believes incremental fiscal and monetary support is now becoming visible through a 25bp PSL rate cut, expanded “six networks” support, increased relending facilities, the RMB800bn policy-financing tool, and mortgage-interest subsidies. However, it expects the immediate effect to be more visible in investment than in domestic demand. Its base case assumes that the PBoC keeps both its policy rate and reserve requirement ratio unchanged for the rest of the year, with neither a budget revision nor a new government-bond quota. In Citi’s view, more significant support for property, consumption, and the labor market could remain absent this year if the growth target stays intact; the year-end Central Economic Work Conference and Politburo meetings are more likely venues for signals of a possible policy pivot into 2027.

Analysis framework

Citi compares September PMI headline readings and sub-indices with August levels, market expectations, expansion thresholds, seasonal patterns, firm-size segments, and sectoral activity. It then links the changes to recently deployed fiscal and monetary measures to assess whether the recovery is broadening from production and construction into domestic demand.

Methodology notes

• Industry AnalysisSupply-demand framework

  PMI sub-index analysis of production, orders, exports, imports, and prices

  The report separates activity into supply, demand, and price indicators to judge whether the PMI rebound reflects broad demand recovery or is mainly driven by production and policy-supported investment.

• Industry AnalysisVolume-price decomposition

  Comparison of activity indicators with purchasing and producer price indices

  Citi uses the simultaneous increase in input and output price indices alongside activity data to characterize the inflation impulse as supply-driven.

Key data

• Manufacturing PMI50.1Up 0.3ppt from 49.8 in August; Citi/market expectations were 50.2/50.1.
• Manufacturing production sub-index51.7Up 1.3ppt and the highest reading this year.
• Overall new orders50.5Down 0.1ppt from the prior month.
• New export orders50.0Down 0.1ppt from the prior month.
• Imports sub-index49.2Up 0.6ppt to a three-month high but still below the expansion threshold.
• Purchasing price index60.8Up 4.2ppt.
• Producer price index54.0Up 3.6ppt.
• Non-manufacturing PMI50.2Up 1.2ppt to a three-month high, above the market expectation of 49.2.
• Construction PMI50.3Up 3.4ppt, returning to expansion after eight months below 50.
• Policy-financing toolRMB800bnCiti links faster deployment to the construction PMI recovery.

Impact & implications

The report sees policy support helping stabilize activity, particularly investment and construction, while limited improvement in orders, imports, and smaller-firm conditions supports its cautious view on a broad domestic-demand recovery. It expects the key policy question to shift toward signals from year-end meetings about potential measures for 2027.

Risks

• A broad policy pivot toward stronger domestic demand may not materialize this year.
• More significant support for property, consumption, and the labor market could remain absent if the growth target is maintained.

What to watch

• Whether the PBoC keeps its policy rate and reserve requirement ratio unchanged through year-end.
• Whether authorities announce a budget revision or a new government-bond quota.
• Signals from the year-end Central Economic Work Conference and Politburo meetings on a possible policy pivot into 2027.
• Whether PMI demand indicators, including new orders, exports, imports, and smaller-enterprise readings, move into sustained expansion.