China Galaxy Securities: What has caused the strong rebound of PMI?

China Galaxy Securities released a research report stating that overall resumption of work and production in February was strong, with the manufacturing PMI higher than the seasonal recovery and the rise in production index showing the resilience of China's economy, highlighting that the manufacturing industry remains the main support in the current economic structure. With the support of the policy of replacing old with new, domestic demand is driving the consumption manufacturing industry to increase production scale. Although President Trump has imposed an additional 10% tariff on China, with expectations of future tariff increases, the "export rush" may still be strengthening. Main points of China Galaxy Securities: On March 1, the National Bureau of Statistics released data: in February 2025, the manufacturing PMI rose to 50.2% (from 49.1% previously). Construction PMI was 52.7% (from 49.3%), and service PMI was 50% (from 50.3%). The February manufacturing PMI increased by 1.1 percentage points month-on-month. By observing other years when the Spring Festival occurred at the end of January, we found that the average month-on-month increase in PMI in February was 0.76 percentage points. This year, the manufacturing PMI is significantly stronger than usual due to seasonal factors. 1. Both supply and demand recover, with the main themes being the policy of replacing old with new and the "export rush". In February, the production index was 52.5% (from 49.8%). The new orders index was 51.1%, and the new export orders were 48.6%, increasing by 1.9 and 2.2 percentage points, respectively. The recovery of the new orders index to the expansion range demonstrates the significant demand pull effect brought about by the policy of replacing old with new, while the external demand, under the impact of Trump's temporarily imposed 10% tariff and expectations of possible future tariff increases, the effect of seizing export markets is ongoing. Both domestic and external demand rising together push the supply side significantly into the expansion zone. In terms of high-frequency data, in February, the production of hot-rolled coils reached 13.04 million tons, significantly higher than the previous 8 weeks of 2022 to 2024. The blast furnace operating rate in February increased by 0.39 percentage points to 77.99%. In the consumption chain, the operating rate of semi-steel tires for automobiles increased by 1.33 percentage points to 66.52%, and by the fourth week of February, it recovered to 82.51%. 2. Both factory and procurement prices rise. The positive factor in February's PMI is the warming of price indices. The factory price index and the raw material purchase price index recorded 48.5% and 50.8%, respectively, increasing by 1.1 and 1.3 percentage points month-on-month. The price increase has a positive impact on corporate revenue and profit, reflecting that the warming demand allows companies to gradually move away from "internal friction". However, it is important to note that the increase in factory prices is still lower than the increase in raw material prices, and the raw material price index has already risen to the expansion zone, while the factory price index is still contracting. However, if the sustainability of demand recovery is maintained, it is worth looking forward to the factory price rising to the expansion zone. The CRB index increased by 3.6% year-on-year in February, rising for four consecutive months, confirming the rise in raw material prices. 3. Purchases have significantly increased, and inventory has started to rise. In February, the procurement volume index rose by 2.1 percentage points to the expansion range, the raw material inventory index decreased by 0.7 percentage points to 47%, and the finished product inventory index increased by 1.8 percentage points to 48.3%. Due to the increase in raw material prices and the impact of the Spring Festival holiday, the raw material inventory declined in February, but with the strong resumption of production and the rise in demand after the Spring Festival, both corporate procurement volume and finished product inventory have shown strong growth, strengthening the incentive for companies to replenish inventory. According to high-frequency data, as of February 28, the inventory of major steel varieties reached 13.41 million tons, an increase of 60% compared to January. 4. Non-manufacturing continues to expand. Regarding non-manufacturing, the construction PMI in February rose by 3.4 percentage points to 52.7%, with new orders and fee prices rising simultaneously, driving construction activities forward. In subsectors, housing construction, construction installation, and real estate have declined, while civil engineering has improved. The service industry fell by 0.3 percentage points to 50%, with new orders and fee prices both decreasing, with productivity services performing better than consumer services. Outlook: The current pain point in China's economy is still insufficient demand. Expanding domestic demand and boosting consumption are one of the current policy focuses, aiming to establish an economic cycle of increasing demand leading to corporate expectations of recovery, expanding production, rising prices, and increasing profits. On February 28, the Qiushi website published President Xi's speech at the Central Economic Work Conference: "Expanding domestic demand is not just a remedy for economic stability and security, but a strategic move. We must accelerate the shoring up of domestic demand, especially consumer demand, to make domestic demand the driving force and stable anchor for economic growth." Expect more policies to expand domestic demand and boost consumption during the two sessions in March. Risk warning: 1. Risks of domestic policy lag; 2. Risks of overseas economic recession.