Insights 
VT 
The official PMIs for China in August 2025 show a manufacturing PMI of 49.4, slightly below the expected 49.5 and previous 49.3. This marks the fifth month in a row that the manufacturing PMI is below 50, indicating ongoing contraction. Domestic demand remains low, contributing to this trend.
The non-manufacturing PMI, which includes services and construction, is aligned with expectations at 50.3, rising from July’s 50.1. The composite PMI comes in at 50.5, improving from the previous 50.2. Unofficial Caixin/S&P manufacturing and non-manufacturing PMIs are set for release on 1st and 3rd September respectively.
Tariff Developments
In related news, a US Federal Appeals court ruled that most of Trump’s tariffs on China are illegal, but the legal proceedings are ongoing. This development may influence China’s stance on tariffs, though the outcome remains uncertain.
The latest data presents a split view of China’s economy, which suggests a cautious and flexible trading approach. The manufacturing sector continues to struggle, marking its fifth consecutive month of contraction and signaling ongoing weakness. This ongoing industrial slowdown has already pushed iron ore futures traded in Singapore below $100 a tonne this month, a level we last saw consistently tested back in late 2023.
Given this industrial weakness, we should consider maintaining or initiating short positions on commodity-linked currencies like the Australian dollar. The AUD/USD pair has struggled to hold above 0.6500 throughout August, and this manufacturing miss provides little reason for that to change. Derivative plays, such as buying puts on AUD/USD, could offer a hedge against further negative data from China’s industrial sector.
Economic Divergence
However, the services sector is showing some resilience, holding in expansionary territory and even ticking up slightly. This suggests that targeted stimulus efforts, like the People’s Bank of China’s 10-basis-point cut to the one-year loan prime rate earlier in the quarter, may be supporting domestic consumption. This divergence could support select Chinese consumer-focused equities, making long calls on ETFs like the KWEB or CHIQ an interesting pair trade against short industrial exposure.
The currency market for the yuan will likely remain choppy. The weak manufacturing data argues for a weaker CNH, but the stable services data might make authorities less inclined to aggressively devalue the currency. We saw a similar dynamic through much of 2024, leading to range-bound trading in USD/CNH, and strategies like selling strangles could be effective if this pattern holds.
The recent US court ruling against Trump-era tariffs adds another layer of complexity. While not a final decision, it removes a significant long-term headwind and could provide a floor for market sentiment. We will be watching the Caixin manufacturing PMI on Monday for confirmation from the private sector, as a similar weak reading could outweigh the positive tariff news and trigger a move lower in global risk assets.
