China’s factory pulse flickers, but the services engine stalls

The September PMI reads from China offered a picture that looked less like a coherent growth engine and more like a car with one cylinder firing while another misfires. Manufacturing, long stuck in the slow lane, finally edged its way back up the hill—climbing to 49.8, a six-month high, though still technically in contraction. It’s a number that feels like an exhausted runner leaning across the finish line: not a victory, but at least forward motion.

The production component, at 51.9, looked more like a fresh set of legs, sprinting ahead to its best pace since spring. New orders crept closer to the expansion mark at 49.7, the PMI equivalent of a tired factory manager flicking the switch back on. Even export orders—China’s perennial pressure point—found a pulse at 47.8, the highest in six months. Employment, too, showed a touch of resilience, nudging to a seven-month high. It’s hardly an employment boom, but at least the bleeding slowed.

The sore spot remains pricing. The ex-factory price index slumped deeper into contraction at 48.2, a reminder that Beijing’s campaign against “involution”—that destructive price-cutting spiral—still isn’t biting. Factories are moving more goods, but they’re being forced to do it at thinner margins, like street vendors selling more bowls of noodles at half price just to keep the crowd coming.

The divergence by firm size paints its own story: large enterprises regained some swagger at 51.0, small shops clawed higher at 48.2, but medium-sized firms slipped back a touch. Once again, the extremes—state-backed giants and scrappy entrepreneurs—show signs of life, while the middle gets squeezed. It’s a barbell economy rather than a balanced one.

The real let-down came outside the factory gates. The non-manufacturing PMI skidded back to 50.0—the most listless reading of the year, sitting right at the threshold between life and stagnation. Think of it as a service sector stuck at the traffic light, the engine humming but the gears refusing to catch. Every major component softened, leaving export orders as the lone shard of light. At 49.8, even that was just brushing up against contraction, but in relative terms it was the bright spot.

The irony is that external demand continues to do more heavy lifting than domestic consumption. China’s growth year-to-date has leaned on exports like a weary hiker leaning on a walking stick. That crutch can hold, but it’s not enough to power a confident stride. And with the non-manufacturing side of the economy—the restaurants, transport firms, real estate operators—slipping toward contraction, it’s clear Beijing still has to grease the wheels.

Markets will interpret this as further justification for additional stimulus. Another 10bp rate trim, another half-percentage point off the reserve requirement ratio, seem like the minimum ante Beijing will have to put on the table before year-end. Policymakers are facing the same dilemma as central bankers everywhere: do just enough to keep the machine humming without over-fueling speculative fires.

In market terms, this PMI print won’t set off fireworks, but it shifts the mood music. For equities, the manufacturing uptick offers a narrative of resilience, while the services wobble keeps the case for policy easing alive. For commodities, the demand story still looks patchy: more steel and machinery orders abroad, but not yet the domestic appetite that drives bulk commodities higher. For FX, the yuan’s immediate fate may be more a function of how much policy support Beijing signals than the PMI itself.

Bottom line: China’s economy is flashing mixed signals, like a set of dashboard lights—green for factories, amber for services, and red for pricing power. Traders should treat it as confirmation of the two-speed reality: export resilience keeps the growth engine from stalling, but without stronger domestic demand, Beijing will be forced back under the hood, spanner in hand, before year-end.