China Galaxy Securities: Why is the PMI rising?

China Galaxy Securities released a research report stating that the rebound in the manufacturing PMI index and the improvements in production, new orders, factory prices, and procurement in August have preliminarily shown the comprehensive effects of policies such as expanding domestic demand and anti-insulation. Currently, the stock market's growing confidence in the economy is playing a significant role in driving the recovery, and wealth effects may further stimulate consumer spending. Future policies to expand domestic demand may be strengthened to consolidate and enhance the positive trend in the economy. As the effects of durable consumer goods policies decline, stimulus policies for service consumption may be further intensified. On August 29, the National Development and Reform Commission announced at a press conference that it will "implement the policy of replacing old consumer goods with new ones smoothly and orderly, ensure policy continuity, accelerate the introduction and implementation of policies in the fields of new economy, digital consumption, "AI + consumption," and promote service consumption in areas such as culture and tourism, sports, and camping." Key points from China Galaxy Securities: The National Bureau of Statistics released data on August 31: In August 2025, the Manufacturing Purchasing Managers' Index (PMI) was 49.4%, up 0.1 percentage points from the previous month, showing an improvement in the manufacturing business climate. The Business Activity Index for construction was 49.1% (previously 50.6%); and for services, the Business Activity Index was 50.5% (previously 50.0%). 1. Supply and demand increase, showing economic resilience. The production index in August was 50.8% (previously 50.5%). The new orders index was 49.5% (previously 49.4%), and new export orders were 47.2% (previously 47.1%). The increase in both supply and demand reflects the economy's continued resilience. However, there was a 1.3-percentage-point gap between supply and demand, with production exceeding demand. The unexpected increase in the production index in August may be attributed to stable domestic demand and the rising stock market boosting economic confidence. Additionally, exporters "rushed to ship out" goods, further increasing production intensity. On July 7, the State Taxation Administration issued a notice on optimizing the declaration of enterprise income tax prepayment, requiring enterprises that act as agents for export goods to simultaneously submit the basic information of the actual export entity and the export amount when making prepayments, further standardizing export policies and cracking down on "proxy exports" (where enterprises without export qualifications use others' export identities to ship goods). Therefore, there may have been "rushing to ship out" behavior among exporters. High-frequency data shows a 6.3% year-on-year increase in port cargo throughput in August. Exports in various industries, such as textile and apparel (33.5%), automobile manufacturing (10.8%), petroleum processing (15.9%), special equipment (8.4%), and general equipment (13.4%), significantly increased, with black metallurgy rising to the expansion range. 2. Price indices are rising simultaneously. The factory price index and raw material procurement price index both rose by 0.8 percentage points and 1.8 percentage points to 49.1% and 53.3%, respectively, for the third consecutive month of price increases. The increase in prices this month is mainly due to initial results in curbing insular competition. Looking at the price PMI for various industries, of the 16 industries surveyed, 11 saw a month-on-month increase in the factory price index, with significant price increases in the midstream and downstream manufacturing industries such as electrical machinery, textile and apparel, and general equipment. Following a significant increase in raw material prices last month, the trend of price increases has spread to midstream and downstream manufacturing industries. In terms of high-frequency data, as of August 31, wire rod prices rose by 4.05% to 3,342 yuan per ton, and soda ash futures prices rose by 3.93% to 1,296 yuan per ton; the changes in raw material prices this month were not significant after rising in July. Against the backdrop of a significant increase in raw material prices, enterprises are raising factory prices to maintain profits while responding to the call to combat insular competition. However, the price gap between raw materials and finished products has widened to 4.2 percentage points (previously 3.2 percentage points), which is still unfavorable for profit recovery. 3. Inventories may enter a passive destocking phase, with procurement increasing significantly to meet production needs. The finished goods inventory index in August decreased by 0.6 percentage points to 46.8%. Raw material inventory and procurement both rose by 0.3 percentage points and 0.9 percentage points to 48% and 50.4%, respectively, with the procurement index entering the expansion range. Currently, companies are maintaining procurement levels in line with fluctuations in new order levels and keeping inventory levels relatively low. This month, with rising demand and export growth, the level of finished goods inventory decreased significantly, and the significant expansion in production prompted companies to increase their procurement scale and stock up on raw materials. With production and orders continuing to rise, companies may passively destock. If this trend continues, the opening of the inventory cycle may be imminent. 4. Significant expansion in large enterprises, summer holidays driving growth in the service industry. In August, the index for large enterprises rose by 0.5 percentage points to 50.8%, while small enterprises saw a slight increase of 0.2 percentage points to 46.6%; medium-sized enterprises decreased by 0.6 percentage points to 48.9%. In the non-manufacturing sector, construction continued to decline by 1.5 percentage points to 49.1%, with outdoor operations affected by weather conditions, and persistent lower-than-2024-level real estate sales data affecting real estate companies' planning. The impact of summer consumption on transportation and leisure activities continued to be evident, and it also drove accommodation and catering activities. The Business Activity Index for railway transport, air transport, and sports and entertainment industries all exceeded 55%, and the Business Activity Index for accommodation and catering industries significantly increased compared to the previous month. 5. Outlook: The rebound in the manufacturing PMI index and the improvements in production, new orders, factory prices, and procurement in August preliminarily demonstrate the effects of policies such as expanding domestic demand and combating insular competition. However, the fact that the manufacturing PMI has been in contraction for five consecutive months also reflects economic pressure, with small and medium-sized enterprises contracting and showing differentiation from large enterprises, indicating that the micro-subjects still feel "unwell." At the same time, the current phenomenon of "rushing to ship out" exports may diminish in October, potentially exerting greater pressure on the economy. Therefore, the economy still needs continuous policy support, especially in terms of increasing demand. Currently, the stock market's growing confidence in the economy is playing a significant role in driving the recovery, and wealth effects may further stimulate consumer spending. Future policies to expand domestic demand may be strengthened to consolidate and enhance the positive trend in the economy, especially as the effects of durable consumer goods policies decline. Stimulus policies for service consumption may be further intensified. On August 29, the National Development and Reform Commission announced at a press conference that it will "implement the policy of replacing old consumer goods with new ones smoothly and orderly, ensure policy continuity, accelerate the introduction and implementation of policies in the fields of new economy, digital consumption, "AI + consumption," and promote service consumption in areas such as culture and tourism, sports, and camping." Risk warning: 1. Risks of policy lag in domestic policies; 2. Risks of overseas economic recession.