China’s Manufacturing Recession Deepens in October Amid Holiday Disruptions and Trade Tensions

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Summary:

China’s October manufacturing PMI dropped to 49.0, its lowest in six months, marking the continuation of a contraction trend since April and reflecting soft domestic demand...

Manufacturing Activity Contracts Sharply, Undermining Signs of Recovery

China’s manufacturing sector shrank further in October, with the official Purchasing Managers’ Index (PMI) falling to 49.0, its lowest point since April. This drop not only missed market expectations of 49.6 but also reversed a gradual improvement observed in recent months, including September’s six-month high of 49.8. The October figure marks the seventh consecutive month below the neutral 50 threshold, reinforcing the view that the recovery in industrial production remains tenuous and heavily dependent on policy stimuli.

The decline in PMI was driven by broad-based weakness across production, new orders, raw material inventory, and employment sub-indexes. Each of these indicators slipped deeper into contraction territory, signaling that the slowdown is not confined to one or two segments of the supply chain but reflects a systemic drop in demand and industrial momentum.

Holiday Closures and Geopolitical Risks Weigh on Output

According to the National Bureau of Statistics, the weeklong Golden Week holiday that ran from October 1 to 8 contributed to the sharp downturn, as widespread factory closures dampened output. However, this seasonal factor does not fully explain the scale of the decline. NBS chief statistician Huo Lihui also cited the growing complexity of the international environment as an additional headwind.

October’s PMI reading coincided with the resurgence of trade tensions with the United States. The renewed imposition of tariffs by President Trump in connection with fentanyl-linked trade disputes increased external uncertainty and placed further pressure on Chinese manufacturing firms, many of which remain heavily reliant on overseas markets.

Mixed Signals from Broader Economic Indicators

While the non-manufacturing PMI inched up to 50.1 in October buoyed by air and railway transport, accommodation, and cultural events during the holiday period, this was insufficient to offset the broader stagnation. The composite PMI, which includes both manufacturing and services, slipped to exactly 50, the weakest reading since December 2022, suggesting stagnation across China’s broader economic landscape.

Fixed-asset investment, a critical driver of China’s long-term economic development, contracted by 0.5% over the first nine months of the year. This decline marks the first such drop since the pandemic-disrupted year of 2020 and indicates that even policy-directed capital spending is beginning to falter.

At the same time, large industrial firms posted a 21.6% increase in profits in October year-over-year, the strongest growth in nearly two years. However, analysts suggest that this uptick may not reflect a robust recovery, but rather a distortion caused by the easing of factory-gate price declines and an aggressive campaign by Beijing to suppress excess capacity and price wars. As such, the rise in profits appears more correlated with administrative measures than with underlying demand revival.

Domestic Demand Remains Subdued Despite Trade Truce

China’s 4.8% GDP growth in Q3 2025, the slowest in a year, keeps it narrowly on track to meet the full-year 5% target. However, this performance conceals deeper challenges. Consumer demand remains soft, weighed down by a prolonged property sector downturn and an uncertain labor market. The resulting weakness in household spending continues to drag on internal economic momentum.

A temporary trade truce announced at the end of October between the U.S. and China, which included the partial rollback of tariffs and reciprocal concessions on rare earths and agricultural goods, provided some geopolitical relief. However, analysts caution that the agreement does not resolve fundamental disputes over industrial policy, technological sovereignty, and regional security, particularly regarding Taiwan. Consequently, the deal is viewed more as a strategic pause than a comprehensive resolution.

Policy May Hold Steady Until 2026 Amid Weak Fundamentals

Zhiwei Zhang, president of Pinpoint Asset Management, noted that the recent easing of trade frictions reduces the immediate need for additional macroeconomic stimulus. He anticipates that proactive fiscal measures will likely resume in early 2026, once the policy landscape is clarified following the closed-door Party meetings that outlined China’s five-year development agenda.

Nevertheless, with domestic consumption lagging behind global norms by a wide margin and investment channels showing signs of fatigue, China’s economic trajectory remains fragile. The manufacturing slump and PMI decline reflect not just temporary disruptions, but a deeper structural imbalance that may require more targeted and transformative policy responses in the coming year.

Source: CNBC

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