Key Takeaways

China's S&P Global/Rating Dog Manufacturing PMI edged into expansion territory at 50.1 in December 2025, beating expectations of 49.8 and rising from November's 49.9. This marks the fourth improvement in five months, suggesting the sector may be bottoming out. The recovery is primarily domestically driven, with new export orders remaining weak, while cost pressures intensified and employment continued to contract.

China's Manufacturing Sector Shows Tentative Stabilization

The latest S&P Global/Rating Dog Purchasing Managers’ Index (PMI) data for December 2025 offers a glimmer of hope for the world's second-largest economy. The headline seasonally adjusted PMI reading of 50.1, a modest increase from 49.9 in November, moves just above the critical 50.0 threshold that separates contraction from expansion. This fractional improvement signals a potential inflection point after months of subdued momentum and aligns with the stronger-than-expected official Manufacturing PMI, which also came in at 50.1.

The result suggests the manufacturing sector may be finding a floor, supported by a nascent recovery in domestic demand. However, the report paints a picture of a fragile and uneven rebound, with external headwinds persisting and internal pressures on costs and employment continuing to challenge business operators.

The Anatomy of the December Rebound

Digging into the sub-indices reveals the mixed nature of the recovery. Manufacturing output returned to growth in December after stagnating earlier in the fourth quarter. This was driven by stronger inflows of total new orders, which manufacturers attributed to domestic new product launches and business development efforts. This domestic focus is the cornerstone of the current uptick.

However, the report highlighted a stark divergence: new export orders declined for the second time in three months. This underscores the persistent weakness in global demand, which continues to act as a drag on China's export-oriented factories. The recovery, therefore, is not broad-based but is being engineered from within China's borders.

Caution in Operations and Persistent Weaknesses

Despite the rise in new orders, business sentiment remained cautious. Overall purchasing activity stagnated as many firms reported holding sufficient stocks of raw materials. This inventory management points to a lack of conviction in the sustainability of the demand recovery.

More concerning were the trends in employment and pricing. Staffing levels fell for a second consecutive month, with job cuts linked to restructuring and cost-control measures. This reduction in workforce capacity, combined with higher sales, led to the fastest accumulation of backlogs of work in three months. To meet demand, firms drew down existing stocks of finished goods, leading to another decline in post-production inventories.

On the pricing front, a challenging dynamic persisted. Input costs rose at the fastest pace since September 2025, driven mainly by higher raw material prices. Yet, in a competitive domestic market, manufacturers continued to cut selling prices to support sales and clear inventories. This squeeze on profit margins was partially offset for exporters, who raised their selling prices for the first time in three months to defend margins abroad.

Understanding the Two PMIs: Official vs. S&P Global/Rating Dog

China publishes two primary PMI surveys, each offering a distinct lens on the industrial landscape:

  • Official NBS PMI: Compiled by the National Bureau of Statistics, it surveys a larger proportion of big, state-owned enterprises (SOEs) and government-linked firms. It is highly sensitive to policy directives and infrastructure spending.
  • S&P Global/Rating Dog PMI: This private-sector survey places greater emphasis on small and medium-sized enterprises (SMEs) and export-oriented companies. It is often considered a more accurate, real-time barometer of private sector health, domestic demand, and employment conditions.

The convergence of both indices at 50.1 in December is significant. It suggests that the tentative stabilization is being felt across both the state-influenced and the more market-sensitive private segments of the manufacturing economy, adding credibility to the recovery narrative.

What This Means for Traders

The December PMI data provides critical signals for asset allocation and risk assessment:

  • FX (CNH, AUD, NZD): A break above 50 is CNY-positive, but the weak export component will limit upside momentum. Traders should watch for sustained expansion above 50.5 to signal a stronger trend. Commodity currencies like the AUD and NZD may see short-term support from the improved demand outlook, but their longer-term trajectory remains tied to the durability of China's domestic recovery and global commodity prices.
  • Commodities (Industrial Metals): The rise in input costs, specifically metals, coupled with expanding domestic orders, is a constructive signal for industrial metal demand (e.g., copper, iron ore). However, traders must differentiate between inventory restocking and genuine end-demand. The stagnation in purchasing activity suggests caution; a follow-through increase in the purchases sub-index in coming months would be a stronger buy signal.
  • Equities (ASX 200, Hang Seng, CSI 300): The data is a mild positive for China-related equities, particularly consumer-focused and domestic industrial names. The continued employment contraction and margin pressure, however, warn of underlying corporate stress. Traders might look for opportunities in sectors benefiting from domestic stimulus, while remaining wary of export-heavy industrials until global PMIs show similar improvement.
  • Macro Strategy: The report supports a "wait-and-see" stance from the People's Bank of China (PBOC). While stabilization reduces the immediate need for aggressive stimulus, the fragility of the rebound and weak exports argue against policy tightening. Traders should monitor credit growth data and potential targeted support for SMEs in Q1 2026.

Conclusion: A Fragile Foundation for 2026

The December 2025 PMI data delivers a cautiously optimistic year-end message: China's manufacturing sector has stopped contracting and is tentatively expanding. The alignment of the official and private surveys at the expansion threshold adds weight to this conclusion. The primary engine—domestic demand—has flickered to life, potentially setting the stage for a gradual recovery in 2026.

However, for traders and policymakers alike, the report is a map of challenges as much as progress. The recovery is lopsided, lacking support from the global economy. Intensifying cost pressures amid falling output prices threaten corporate profitability, and continued job shedding could eventually undermine the very domestic demand driving the upturn. The business sentiment gauge, while positive, remains below historical averages, reflecting this pervasive uncertainty.

Looking ahead, the trajectory of China's manufacturing in Q1 2026 will be crucial. Sustained expansion above 50.5, a stabilization in employment, and a recovery in the new export orders index will be key markers to watch for confirmation that this is more than a temporary stabilization. Until then, the sector—and the markets watching it—are on a fragile foundation, where policy missteps or external shocks could quickly return the PMI to sub-50 territory.