Official PMI edged up slightly in June, but domestic demand and price signals remain weak

Overview

This report interprets China's official PMI data for June. The manufacturing PMI rose to 50.3 and the non-manufacturing PMI rose to 50.2, both slightly better than market and Nomura expectations. The report argues that the improvement in manufacturing mainly came from a rebound in new orders and new export orders, with strong performance in AI-related electronic equipment, information technology, and digital economy-related industries; however, sectors such as real estate, construction, chemical fiber, rubber and plastics, and ferrous metal processing remained weak. Price and employment sub-indices show that insufficient demand and margin pressure persist, and the macro recovery foundation is not solid.

Core views

The core views are: first, the apparent PMI improvement should not be interpreted as a significant rebound in June economic activity, as part of the improvement may come from incomplete seasonal adjustment at quarter-end; second, although export growth is strong, it is mainly concentrated in AI-related industries and also drives higher imports, limiting its net contribution to real economic growth; third, domestic demand remains dragged down by the payback effect from the trade-in policy, the prolonged downturn in real estate, and the intensifying 'double-K-shaped' divergence; fourth, after investment weakened markedly again, policymakers may accelerate bond issuance and increase fiscal spending to stabilize investment.

Analysis framework

The report uses the headline readings of official manufacturing and non-manufacturing PMIs, sub-indicators, firm size, industry structure, and price indicators as the main framework, combining market expectations, Nomura forecasts, quarterly averages, and NBS industry sub-index descriptions to assess economic momentum, demand strength, inflation pressure, and policy implications.

Methodology notes

• Macro leading indicatorsPMI expansion-contraction threshold analysis

  50 threshold

  A PMI above 50 usually indicates month-on-month expansion, while below 50 indicates month-on-month contraction; the report uses this to distinguish the business conditions of manufacturing, services, construction, and their sub-indices such as new orders, prices, and employment.

• Macro structural decompositionPMI sub-index and industry decomposition

  Orders, production, prices, employment, and firm-size sub-indices

  By examining new orders, export orders, production, inventories, employment, prices, and PMI readings for large, medium, and small enterprises, the report assesses whether the improvement is broad-based, sustainable, and driven by only a few industries.

• Inflation assessmentInferring PPI from price sub-indices

  Input prices and output prices indices

  The drop in the output price index below 50 is used to support the view that June PPI month-on-month will turn negative, while the pullback in input prices shows easing cost pressure but still-weak demand.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• China macroeconomy

  PMI is an important coincident and leading indicator for assessing short-term economic activity.

  Strengths

  Both manufacturing and non-manufacturing PMIs rose slightly, with improvements in orders and production sub-indices.

  Weaknesses

  Domestic demand, investment, employment, real estate, and price sub-indices remain weak, and growth momentum is unbalanced.

  Comparison

  The average manufacturing PMI in Q2 was higher than in Q1, but GDP growth is expected to slow from 5.0% in Q1 to 4.1% in Q2.

  Risks

  The PMI improvement may be affected by quarter-end seasonal adjustment factors, and actual activity data may not rebound significantly.

• AI-related electronic equipment supply chain

  The report believes June export improvement was mainly concentrated in AI-related industries and also drove some imports.

  Strengths

  Production and new order indices for industries such as computers, communications, and electronic equipment were all above 54.0, and service activity related to the digital economy and AI infrastructure was strong.

  Weaknesses

  Growth is highly concentrated, spillover to the broader economy may be limited, and simultaneous import growth reduces the net export contribution.

  Comparison

  Performance was clearly stronger than in weak industries such as real estate, air transport, chemical fiber, rubber and plastics, and ferrous metal processing.

  Risks

  If global AI demand cools or trade disruptions intensify, related export support may weaken.

• Real estate and construction chain

  The real estate slump continues to drag on non-manufacturing activity and domestic demand, and the construction PMI remains in contraction.

  Strengths

  The construction PMI rose slightly from 48.8 to 49.0, and the construction employment sub-index rose from 41.4 to 42.3.

  Weaknesses

  Construction has remained below 50 for six consecutive months, real estate-related service indices are below the expansion-contraction line, and the employment sub-index is still extremely weak.

  Comparison

  Compared with the services PMI of 50.4, the construction PMI of 49.0 shows real estate and construction activity remain weaker.

  Risks

  A continued real estate downturn would further weigh on investment, employment, household income, and consumption.

• Industrial goods prices and PPI

  Price sub-indices are used to assess industrial inflation and corporate margin pressure.

  Strengths

  The input price index remains above 50, indicating some residual support on the cost side.

  Weaknesses

  The output price index fell to 48.2, making it difficult to raise selling prices, and non-manufacturing selling prices also remain in contraction.

  Comparison

  Input prices fell from 60.5 to 54.2, while output prices fell from 51.9 to 48.2, showing price pressure has shifted from costs to insufficient demand.

  Risks

  If output prices continue to decline, PPI deflation and margin compression may persist.

Key data

• Official manufacturing PMI50.3June reading, versus 50.0 in May; above the consensus expectation of 50.1 and Nomura's forecast of 49.8.
• Official non-manufacturing PMI50.2June reading, versus 50.1 in May; also above the consensus expectation of 49.9 and Nomura's forecast of 49.8.
• Quarterly average of manufacturing PMI50.2Average for Q2 2026, above 49.6 in Q1.
• Manufacturing new orders51.2In June it rose sharply from 49.9 in May into expansion territory, the main source of the improvement in manufacturing.
• Manufacturing new export orders50.1In June it returned to expansion territory from 48.6 in May, supporting the view of relatively strong export growth.
• Manufacturing production index51.4In June it edged up from 51.2 in May.
• Manufacturing input price index54.2Still above 50 in June, but down markedly from 60.5 in May.
• Manufacturing output price index48.2In June it fell below 50 from 51.9 in May, the first time this year below the expansion-contraction line.
• June PPI month-on-month forecast-0.3%Nomura expects June PPI month-on-month to turn from 0.5% in May to -0.3%.
• Medium-sized enterprise PMI50.5In June it rose from 48.6 in May into expansion territory.
• Large enterprise PMI50.7In June it fell from 51.1 in May but remained above 50.
• Small enterprise PMI48.2In June it declined further from 48.5 in May and remained in contraction territory.
• Services PMI50.4In June it rose slightly from 50.3 in May.
• Construction PMI49.0In June it rose slightly from 48.8 in May, but remained in contraction territory for a sixth consecutive month.
• Non-manufacturing new orders48.0Up 3.0 points from May in June, but still well below 50, showing demand remains weak.
• Non-manufacturing backlog orders44.2Versus 43.8 in May, still at a low level, indicating limited visibility for future demand.
• Q2 real GDP growth forecast4.1% y-o-yNomura maintains its forecast and believes growth will slow from 5.0% year-on-year in Q1.

Impact & implications

The macro implication is cautiously negative: slightly better PMI readings do not mean a broad economic rebound, as the improvement comes more from export orders and AI-related sectors, while domestic demand, real estate, construction, employment, and prices remain weak. If investment continues to decline and conflicts with the policy goal of stabilizing investment, fiscal policy may be stepped up through faster bond issuance and increased fiscal spending. For markets, the short-term focus should be on whether growth data can validate the PMI improvement and whether declining prices continue to compress corporate profits.

Risks

• The PMI improvement may partly stem from incomplete seasonal adjustment at quarter-end and cannot be directly interpreted as a sharp rebound in June activity data.
• Conflict in the Middle East disrupts factory operations in raw materials industries.
• The payback effect from the trade-in policy, the prolonged real estate downturn, and the intensifying 'double-K-shaped' divergence continue to suppress domestic demand.
• The export improvement is concentrated in AI-related industries, with insufficient sector breadth and rising imports at the same time, limiting the net growth contribution.
• Output prices and selling prices are below 50, and corporate margins may remain under pressure.
• Continued contraction in construction and real estate-related activity may weigh on investment and employment.
• The non-manufacturing employment index remains low, which may limit household income growth and consumer demand.

What to watch

• Whether June activity data such as industrial value-added, retail sales, and fixed-asset investment validate the PMI improvement.
• Whether export growth continues to be led by AI-related industries, and the extent to which rising imports offset the net export contribution.
• Whether June PPI month-on-month turns to -0.3% as Nomura forecasts.
• Whether bond issuance and fiscal spending accelerate to offset the investment slowdown.
• Whether real estate, construction PMI, and related employment sub-indices remain below 50.
• Whether non-manufacturing new orders and backlog orders can recover to levels closer to expansion territory.