Market Update: Manufacturing PMI Back in Expansion, and the Continuation of China’s AI Cycle

Demand: an expansion not yet confirmed

Output rose 1.3 points to 51.7, the highest reading this year and the main driver of the rebound. Orders did not follow: new orders slipped to 50.5, new export orders fell to the 50.0 dividing line, and backlogs of orders stayed in contraction at 46.0. Output running ahead of new orders, and new orders ahead of backlogs, forms a chain that weakens at each step — production is being supported by the delivery of existing orders rather than by a steady flow of new demand. Two further indicators point the same way: employment at 48.4 shows that the expansion in output has not yet lifted hiring, and while finished-goods inventories fell, raw-material inventories remained in contraction, meaning firms have not begun restocking. Restocking usually follows a firm’s own confirmation that demand will hold; its absence means this month’s improvement has not yet been validated by corporate behaviour.

The AI signal inside the data: five independent datasets, one direction

The same dataset contains a second signal running the other way. Output prices rose to 54.0, but the increase was driven by relatively fast price gains in a small number of sectors — petrochemicals and consumer electronics — while the broader industrial goods market remains one of strong supply and weak demand. Within manufacturing, high-tech and equipment manufacturing stayed in expansion while energy-intensive industries continued to contract. Within services, internet software and IT services remained among the strongest sectors, supported by the global AI investment cycle and continued progress in domestic large models, while real estate sat deep in contraction. The improvement captured by the survey is not broad-based; the three areas of strength point to a single chain.

This is not an isolated signal. Placing different statistical sources side by side, the direction is consistent. On prices, output prices in computer, communications and other electronic equipment manufacturing have accelerated for two consecutive months, and the increase has passed through to consumer electronics at the retail level. On profits, the sector’s profits grew 18.5% year-on-year in the first seven months, contributing more than 80% of the entire electronics industry’s profit increment. On production, electronics output rose 17.2% year-on-year in August. On trade, integrated circuit exports more than doubled year-on-year in the first eight months and have become China’s largest export category. On reported earnings, the CSI All-Share Information Technology Index delivered 20% revenue growth and 74% earnings growth in the first quarter, with earnings growing close to four times as fast as revenue. Five independent statistical sources pointing to the same chain is the most complete body of evidence in this data round.

The contrast on the domestic demand side is stark: retail sales grew just 0.4% year-on-year in August, and property development investment fell 19.9% in the first eight months. The K-shaped divergence — new growth drivers rising while traditional ones decline — is therefore no longer a contrast between manufacturing and services, but one occurring inside both sectors at once. For investors, the implication is that a headline reading back above 50 does not justify allocating to the headline: the verifiable part of the improvement is narrow, and it coincides with the AI chain.

Policy: two layers of funding, only one of them technology-directed

This month’s policy measures should be read in two layers rather than grouped together. The technology-directed layer is the RMB 800 billion new policy-based financial instrument. It is 60% larger than the RMB 500 billion deployed in 2025 and equivalent to roughly 0.6% of 2025 gross domestic product; the 2025 round supported projects with total investment of more than RMB 7 trillion, and the current round is estimated to mobilise RMB 8–11 trillion. More important than the size is the direction: alongside traditional infrastructure, the instrument is explicitly tilted toward the digital economy, AI infrastructure, the low-altitude economy and commercial space — the same direction in which the activity data is concentrated. The technology finance component of the central bank’s structural tools, refined at the end of the month, belongs to the same layer.

The second layer addresses domestic demand and financial inclusion and has no direct bearing on the AI chain: the first nationwide interest subsidy on selected new residential mortgages, announced jointly by the Ministry of Finance, the People’s Bank of China and the National Financial Regulatory Administration, and the support for small and micro enterprise funding within the structural toolkit. These measures matter for stabilising property and employment — they are an offset to the lower half of the K-shaped divergence — but they are not the basis for the allocation view in this article. On the aggregate stance, core CPI (Consumer Price Index) excluding food and energy rose 1.0% year-on-year in August, leaving core inflation subdued and the conditions for a supportive stance intact, while the relative strength of production and exports reduces the urgency of broad-based easing.

Risks

• Global AI capital expenditure and exports: New export orders have already fallen back to the dividing line. Revenue in China’s AI chain is export- and capex-driven, so a slowdown in global computing investment or greater external trade volatility would put earnings estimates — and the target level — under downward pressure.

• Demand may fail to expand on its own: Backlogs of orders and employment remain in contraction and firms have not started restocking. If new orders fall back once seasonal and timing effects fade in the fourth quarter, the improvement in output will be hard to sustain.

• Deeper margin pressure midstream and downstream: The gap between input and output prices widened further. If raw material prices continue to rise faster than finished goods prices, profits will come under more pressure, which may in turn weigh on production and investment appetite.

• Sensitivity of earnings and valuation assumptions: The target level rests on a fair PE of 55x applied to 2028 estimated earnings per share. If earnings growth undershoots, or the market applies a lower fair multiple, the potential upside narrows materially

• Higher-for-longer rates offshore: Elevated long-end yields offshore can compress growth-asset multiples through global risk appetite, independently of domestic activity and policy.

Valuation and three-year potential

Our view that this cycle is driven by earnings delivery rather than multiple expansion can be tested on the valuation path itself. Measured against the current index level and estimated earnings per share for each forecast year, the forward PE of the CSI All-Share Information Technology Index falls from the low fifties in 2026 to the mid-thirties by 2028 — the rapid expansion of the denominator compresses the multiple on its own. We retain a fair PE of 55x, slightly above the 2026 forward multiple on the current index level but well below the index’s realised valuation centre in recent years, so that the target return comes principally from earnings growth rather than from re-rating.

On that basis the index carries a target level of 17,224, implying roughly 57% of three-year upside from around 11,000. The principal driver is earnings per share rising from RMB 1.16 to RMB 1.72, a gain of about 48%; if earnings growth undershoots, or the market applies a multiple below 55x, the potential narrows accordingly.

Fund in focus and allocation framework

The concentration of activity identified in this article sits in the onshore electronics and semiconductor chain, and the GF CSI All Share Information Technology Index ETF is the instrument that corresponds directly to that argument.

This allocation is framed over the medium to long term: the pass-through from activity and prices into revenue and profit usually takes several quarters, and monthly fluctuations in survey readings are not a reason to change the structure of a portfolio. Investors should size the position according to their own risk tolerance and investment horizon.

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Use of Artificial Intelligence

Artificial intelligence tools may have been used in the drafting, data compilation and chart preparation of this report; all resulting output has been independently reviewed and verified by the research team.