China Caixan PMI shows modest expansion as a new round of trade wars kick into gear

The latest Caixin China PMI report for January 2025 showed modest expansion in the manufacturing sector, with the headline Manufacturing PMI slipping slightly to 50.1 from 50.5 in December, staying just above the neutral 50.0 mark. While manufacturing output continued to grow, new orders increased at a faster pace, primarily driven by strong domestic demand, though export orders declined for the second consecutive month. Firms expanded purchasing activity and increased inventories, but employment levels fell at the fastest rate since February 2020. Despite stable input costs, manufacturers cut selling prices to support sales, leading to the steepest decline in output prices in 18 months. Business confidence improved but remained below historical averages due to concerns over U.S. tariffs and trade uncertainty.

The manufacturing sector’s performance suggests a modest but fragile recovery, with domestic demand offsetting external weakness. Output has now expanded for 15 consecutive months, but job cuts and soft export demand highlight ongoing pressures. The fall in employment signals cost-cutting measures by firms, as they remain cautious about hiring despite rising backlogs of work. While the government’s stimulus measures appear to be supporting local demand, external headwinds—especially from trade disputes and slowing global investment—are capping overall growth. Inflationary trends remain subdued, with manufacturers absorbing cost pressures rather than passing them to consumers.

The services sector’s performance is not included in this specific release, but given China’s ongoing economic transition towards domestic consumption, its trajectory remains crucial for broader recovery. In terms of inflation, prices remain weak, with firms offering discounts to maintain sales. The stabilization in input prices reflects a mixed cost environment, with raw material price hikes being offset by supplier discounts. Meanwhile, supply chain efficiency improved, with shorter delivery times helping firms manage inventory better. These trends indicate that firms are adjusting to slower external demand by focusing on domestic sales strategies and operational efficiencies.

Looking ahead, China’s economic outlook remains uncertain, particularly given the recent imposition of U.S. tariffs. While domestic demand is improving, the sharp decline in employment, soft exports, and weak pricing power signal potential challenges in sustaining this momentum. The recent rally in Chinese AI stocks, fueled by optimism surrounding DeepSeek’s emergence, raises the question of whether investors will start turning to lower-valued Chinese ADRs amid trade tensions. Policymakers may need to introduce further stimulus measures to maintain momentum, but the effectiveness of existing programs is already being tested. In this environment, market participants will closely watch trade negotiations, government policy shifts, and global demand trends to gauge the sustainability of China’s economic recovery.