Rising Demand in Manufacturing Sector
Input costs increased at the fastest rate since November 2024, but selling prices remained steady due to competition. Business confidence reached its highest point since March, despite potential impacts from tariffs, export trends, and the property market.
Previously known as the Caixin PMI, now sponsored by ‘Rating Dog’, the report came alongside a China Manufacturing PMI of 49.4, slightly below the expected 49.5. The Services PMI was reported at 50.3, matching expectations.
Divergence in Economic Data
This surprise expansion in the S&P Global PMI, which reflects smaller private firms, contrasts sharply with the official data on large state-owned enterprises. This divergence suggests a two-speed recovery, creating opportunities for traders who can distinguish between sectors. Given this, we should be cautious about broad, bullish bets on the entire Chinese economy.
The report’s mention of rising input costs at the fastest pace since November 2024 is a strong signal for commodities. With backlogs of work also building, we can anticipate increased demand for industrial metals. For instance, iron ore futures, which saw a slump in mid-2025, could see renewed buying interest, making call options on miners and commodity ETFs an attractive short-term play.
For equities, the positive data may trigger a rally in indices like the FXI, which has been trading in a tight range for months. However, the persistent drop in employment and the ongoing property slump, which saw new home prices fall by another 0.7% in July 2025 according to the National Bureau of Statistics, cap the upside. This conflict in signals suggests volatility is a better trade, making long straddles on key ETFs a viable strategy to capture a significant price move in either direction.
The margin squeeze, with input costs rising while selling prices remain flat, points to trouble for specific manufacturers. We should look at buying put options on industrial companies known for having low pricing power and high energy costs. This allows us to profit from the likely dip in their upcoming earnings reports.
This recovery appears fragile, as it hinges on the temporary postponement of tariffs. We have seen this pattern before, particularly during the trade negotiations of 2024, where front-loading of exports created a temporary boost that quickly faded. Any negative shift in trade policy could reverse this month’s gains, making it prudent to hedge long positions with options that protect against a sudden downturn in the yuan.
