China’s manufacturing PMI has been below 50 since April, yet industrial production growth has been strong. This deviation can be attributed to the nation’s shift towards high-end manufacturing. A PMI reading of 49.3 might be a more accurate threshold between expansion and contraction.

The official manufacturing PMI remained below 50 from April to September, suggesting declining manufacturing activity. Despite this, industrial production growth maintained a year-on-year increase of 6.2% in August 2025, with positive seasonal adjustments.

China’s Shift Towards High End Manufacturing

The difference may arise from the PMI sample composition and China’s evolving industrial structure, focusing more on high-value-added sectors. The high-energy-consuming sector has hindered PMI, whereas hi-tech and equipment manufacturing have gained more share in industrial production.

A headline manufacturing PMI of 49.3 could more accurately indicate expansion or contraction. Therefore, the September PMI of 49.8 suggests an increase in industrial production, despite its below-50 status.

We believe the market is misinterpreting the recent string of sub-50 manufacturing PMI readings from China. September’s headline figure of 49.8 is being viewed as a sign of continued contraction, creating bearish sentiment. This overlooks the resilience seen in the underlying hard data.

The disparity likely stems from the PMI survey’s focus on older, energy-intensive sectors, which are dragging down the headline number. Meanwhile, China’s shift towards high-end manufacturing is driving strong industrial production, with September’s IP data released last week confirming this trend at a robust 6.4% year-on-year. This structural shift means traditional indicators are losing their predictive power.

Opportunities And Market Implications

Our analysis over the past five years suggests a new dividing line for expansion and contraction at a PMI reading of 49.3. Therefore, the September PMI of 49.8 does not signal a contraction but rather points to solid month-on-month expansion. This indicates the economy has more momentum than is currently being priced into assets.

This suggests that bearish bets on industrial commodities may be overextended. We see potential for upside in copper and iron ore futures, as underlying demand is likely stronger than the headline PMI implies. Prices for iron ore on the Dalian Commodity Exchange have already edged up over 2% in early October but remain well below their summer 2025 highs.

For equity derivatives, this creates an opportunity to position for a potential repricing of Chinese industrial and technology stocks. Options strategies that benefit from a rally in the CSI 300 index could be considered, as the market may soon catch up to the reality of resilient output. We saw a similar pattern back in late 2023 when PMI figures undershot the eventual rebound in industrial output, catching many traders off guard.

In the currency market, this view challenges the narrative for a significantly weaker yuan. If industrial activity is indeed expanding, the People’s Bank of China will have less incentive for aggressive easing. This could provide a floor for the yuan, making strategies that bet against a sharp depreciation of the currency look attractive.

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