China’s official manufacturing purchasing managers\u2019 index (PMI) dropped to 49.3 in January, reflecting a contraction and was below expectations. The non-manufacturing PMI also decreased to 49.4, a 37-month low, which indicates ongoing domestic issues despite stronger external activity.<\/p>\n
For manufacturing, the PMI was in contraction for nine out of the last ten months. Key sub-indices weakened, with new orders at 46.1 and export orders at 46.9, both lower than December’s levels.<\/p>\n
China aims to improve service consumption and quality to stimulate domestic demand. Any future efforts to enhance the service sector could be reflected in future non-manufacturing PMI data.<\/p>\n
The latest official manufacturing PMI data for January showed a contraction at 49.3, which was well below what we were forecasting. This weak start to the year, coupled with a non-manufacturing PMI slipping to a 37-month low, suggests China’s domestic economy is struggling more than anticipated. The decline in new orders to 46.1 is particularly concerning for the quarter ahead.<\/p>\n
We should note, however, that the Caixin Manufacturing PMI, which surveys smaller private firms, actually edged up to 50.8 in January. This divergence indicates that while state-owned enterprises are struggling, some parts of the private sector are holding up. This split picture suggests targeted trades may be more effective than broad-based bearish bets on the entire Chinese economy.<\/p>\n
This softness in Chinese manufacturing directly threatens demand for industrial commodities. With LME copper prices currently hovering around $8,600 per tonne, we see a clear case for buying put options to hedge against a potential drop towards the $8,200 support level we saw in late 2025. Similarly, iron ore prices, which fell over 9% in January, look vulnerable to further declines.<\/p>\n
The Australian dollar is particularly exposed given Australia’s heavy reliance on exports to China. After seeing record iron ore shipments to China at the end of 2025, this new data puts future demand in serious doubt. We are now looking at shorting AUD\/USD futures, as the currency often acts as a liquid proxy for Chinese economic sentiment.<\/p>\n
We must also consider the policy response, as the People’s Bank of China already cut the bank reserve requirement ratio by 50 basis points just last week to inject liquidity. This stimulus may take time to work its way through the economy and could eventually support the services sector later this year. For now, the market sees this as a reaction to weakness rather than a proactive growth measure.<\/p>\n
The uncertainty created by this data makes volatility an attractive play. The divergence between weak official data and stronger private surveys, combined with policy stimulus, is a recipe for sharp market movements. Therefore, we are considering buying call options on the VIX, as any further negative surprises from China could easily trigger a broader risk-off move in global equity markets.<\/p>\n
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