China's private sector showed renewed vigor in September, according to a closely watched survey released this week. S&P Global's RatingDog China Composite Output Index climbed to 52.4, up from the previous month and comfortably above the 50 threshold that separates expansion from contraction. That reading outpaced the official government gauge, which came in at 50.7, indicating that both manufacturing and services activity picked up during the month.
The divergence between the two surveys is notable. The official PMI, compiled by China's National Bureau of Statistics, tends to survey larger, state-linked enterprises, while S&P Global's index leans more toward private and smaller firms. The fact that the private-sector reading is higher suggests that the recovery is broadening beyond state-backed industries, a positive sign for the overall health of the economy.
What is a PMI and why does it matter?
Purchasing managers' indexes (PMIs) are monthly surveys that ask business executives whether key metrics like new orders, output, employment, and supplier delivery times have improved, worsened, or stayed the same compared with the previous month. A reading above 50 means more firms reported improvement than deterioration, while a reading below 50 signals contraction.
PMIs are among the first economic indicators released each month, making them a timely snapshot of business conditions. They are also forward-looking because they capture sentiment about future orders and hiring. For investors, PMIs offer an early read on economic momentum, which can influence corporate earnings and market sentiment.
In China's case, the September data points to a private sector that is holding up despite a challenging backdrop. The country has been grappling with a property market downturn, weak consumer confidence, and sluggish export demand. Yet the latest figures suggest that the drag from these headwinds may be easing, at least in the sectors covered by the survey.
Manufacturing and services both expand
The composite index is a weighted average of separate manufacturing and services PMIs. Both components were in expansion territory in September, according to the S&P Global data. Manufacturing benefited from a rebound in new orders, including from overseas buyers, while services activity was supported by resilient domestic demand.
This broad-based improvement is a contrast to earlier in the year, when the recovery was uneven and heavily reliant on government stimulus. The fact that private firms are now reporting better conditions suggests that the economy is finding its own footing, even as policymakers continue to roll out support measures.
However, the official services PMI, which came in at 50.7, was slightly below the private-sector reading, and some analysts have noted that price competition remains a concern. Services growth in September was accompanied by discounting, which could squeeze profit margins even as activity expands.
What it means for investors
For investors, the September PMI data is a cautiously encouraging signal. China is a major engine of global growth, and a healthier private sector there can have ripple effects on commodity prices, global supply chains, and multinational companies that sell into the country.
The stronger-than-expected reading also comes at a time when Beijing has been rolling out measures to support the property market and boost consumer spending. Property-related stocks have rallied on the back of these pledges, though markets remain wary of the sector's long-term outlook.
Still, the gap between the private and official surveys is worth watching. If the private sector continues to outpace the state sector, it could signal that the recovery is becoming more self-sustaining, reducing the need for further aggressive stimulus. Conversely, if the gap narrows because the official index catches up, that might indicate that government spending is doing the heavy lifting.
For everyday investors, the key takeaway is that China's economy is not collapsing, but it is also not firing on all cylinders. The September data suggests a modest improvement, but the sustainability of that trend will depend on whether demand holds up in the coming months. Export orders have been a bright spot, but global trade tensions and slowing growth in other major economies could weigh on that front.
Investors with exposure to Chinese equities, or to companies that rely heavily on Chinese demand, should watch the next few PMI releases for confirmation that the improvement is lasting. A sustained reading above 50 would be a positive sign, while a dip back below would raise fresh concerns.
In the meantime, the data offers a reason for measured optimism. China's private sector, which employs the vast majority of its workforce and drives much of its innovation, appears to be regaining some momentum. Whether that translates into stronger corporate earnings and higher stock prices remains to be seen, but the September numbers are a step in the right direction.
