China's Factory Activity Grows in September Supported by AI Demand

China's factory sector showed signs of revival in September as the official manufacturing purchasing managers' index (PMI) edged above the crucial 50-point mark, indicating expansion for the first time in three months. The National Bureau of Statistics reported the PMI rose to 50.1 in September from 49.8 in August, matching expectations from a Reuters survey and ending a brief period of contraction.

This improvement reflects a combination of factors including reduced weather-related disruptions and robust demand linked to the global surge in artificial intelligence technologies. China, the world's second-largest economy, has increasingly leaned on manufacturing and exports to bolster growth amid weak domestic consumption.

The production sub-index climbed to 51.7, up from 50.4 the previous month, suggesting factory output accelerated. Meanwhile, the new orders index increased to 50.5, showing some gains in demand though domestic consumption remains uneven. A private-sector gauge, the RatingDog manufacturing PMI, also rose to 52.1, the highest in five months, reinforcing signs of improvement in manufacturing activity.

Despite these positive signals, the recovery has been uneven across different company sizes. Smaller manufacturers continued to struggle, with medium-sized firms registering a PMI of 49.7 and small companies at 48.9, both below the expansion threshold. Employment within manufacturing also remained weak, with the hiring sub-index staying under 50, highlighting ongoing challenges in job creation.

Outside of manufacturing, China's non-manufacturing PMI, which covers services and construction, improved to 50.2 from 49.0 in August. Both sectors edged into growth territory, with construction at 50.3 and services at 50.2. However, new orders for these sectors stayed below 50, indicating that demand constraints persist.

These developments come as Beijing has intensified targeted efforts to support the economy. On Tuesday, authorities announced measures to channel cheaper credit toward infrastructure, technology, and other priority areas, alongside expanded support for homebuyers. Policymakers face pressure to continue stimulus efforts due to ongoing weaknesses in retail spending, investment, and the prolonged downturn in the property market.

China’s trade surplus is expected to exceed $1 trillion for the second year running, reflecting the country’s reliance on exports amid subdued domestic demand. Nonetheless, geopolitical tensions, particularly with the United States, pose risks to exporters. Recently, China and the US agreed to reduce tariffs on $60 billion worth of goods, but key products were excluded from the deal, leaving uncertainty over future trade relations.

For Chinese manufacturers, strong overseas demand could help offset soft domestic consumption. However, rising trade barriers may pressure export volumes and corporate profits. This complex trade landscape adds to the challenges faced by the industrial sector.

The September PMI figures may provide some encouragement to Chinese equity markets by boosting expectations for industrial earnings and economic momentum, especially in manufacturing, technology, infrastructure, and export-driven companies. Stocks tied to AI and semiconductor industries could attract investment due to increased spending in these areas, while infrastructure firms may benefit from government credit support.

Stronger manufacturing data could also lift confidence in banks and financial institutions if investors anticipate higher lending and economic activity. Still, the modest PMI increase does not yet point to a broad-based recovery. Weakness in property markets, consumer demand, employment, and trade uncertainties continue to temper enthusiasm.

Chinese stock markets remain under pressure amid doubts over whether stimulus measures will translate into sustainable growth. Market participants are likely to watch upcoming data on retail sales, fixed-asset investment, property activity, and corporate earnings for clearer signs of a broader economic rebound.

In the wider Asian market context, stronger Chinese industrial activity may benefit regional companies exposed to Chinese demand, including commodity producers, machinery manufacturers, and semiconductor suppliers. Conversely, higher Chinese output could intensify competition for exporters in other countries.

Overall, the September PMI suggests China's industrial sector regained some momentum as the third quarter ended. However, the fragile state of the domestic economy maintains the need for continued policy support from Beijing.