China’s January Purchasing Managers’ Indices (PMIs) have shown a decline, with the Manufacturing PMI falling to 49.3 and the Non-Manufacturing PMI at 49.4. This dip could lead to policy easing, potentially involving rate cuts and adjustments to the reserve requirement ratio if domestic growth does not improve.
The construction sector is notably affected, as evidenced by a marked decrease in the construction PMI. Despite the overall disappointing performance, the manufacturing PMI’s price-related sub-indices indicate some positive movement. The input price index rose to 56.1, and the output price index showed expansion for the first time since June 2024, at 50.6.
Policy Adjustments and Fiscal Deficit
Further policy adjustments are anticipated, with expectations that the fiscal deficit-to-GDP ratio may increase to 4.5% in the upcoming March National People’s Congress. Additionally, the broader fiscal deficit ratio is anticipated to rise from 8.4% to 9.0%.
Looking back at the weak PMI data from January 2025, we saw clear signals of a slowing economy, particularly in the construction sector. The readings below 50 correctly pointed toward a need for government intervention to stimulate growth. These concerns set the stage for a year of policy adjustments.
Throughout 2025, authorities did respond with the anticipated easing measures to support the economy. We saw the People’s Bank of China cut its one-year loan prime rate twice, bringing it down to 3.25% by year-end, and it also lowered the reserve requirement ratio for banks. This response was a direct consequence of the weakness identified early in the year.
Now, in February 2026, the situation remains challenging despite that stimulus. While January’s industrial output showed a modest 3.5% year-over-year increase, the property market continues to be the primary concern, with new home prices falling again last month. The persistent weakness in real estate suggests that the earlier easing measures have not been enough to solve the core problem.
Trading Strategies in a Volatile Market
For traders, this points to continued weak demand for industrial metals linked to construction. We should consider strategies that benefit from stagnant or lower prices for commodities like iron ore and copper over the coming weeks. Purchasing put options on commodity ETFs that track these base metals could be a way to position for this view.
The pressure for further stimulus is building again, which likely means more monetary easing is on the horizon. This scenario would put downward pressure on the Chinese yuan. We believe going long on USD/CNH currency pairs, or buying call options on USD/CNH, is a prudent strategy to anticipate a weakening yuan.
Given the divergence between struggling domestic sectors and supported export-oriented industries, we expect continued volatility in Chinese equities. One could use options on major Chinese stock indices, like the Hang Seng or ETFs like FXI, to trade this uncertainty. Implementing a long straddle, which involves buying both a call and a put option, would profit from a large price move in either direction.
