China’s Factories Return to Growth as AI Demand Offsets Weak Domestic Momentum

China’s official manufacturing PMI increased to 50.1 in September from 49.8 in August, moving just above the 50-point threshold separating expansion from contraction and matching economists’ expectations. The improvement ended two consecutive months of contraction and partly reflected the fading impact of heavy rain and other weather disruptions that had affected production during the summer. More importantly, the underlying production index climbed sharply to 51.7 from 50.4, while new orders remained in expansion territory at 50.5. Procurement activity also strengthened as manufacturers increased purchases in response to higher output. The recovery extended beyond manufacturing: the official non-manufacturing PMI rose to 50.2 from 49.0, while the composite PMI reached 50.7, suggesting that overall business activity improved toward the end of the third quarter.

The composition of the manufacturing rebound shows how important technology-related industries have become to China’s economic resilience. High-tech manufacturing recorded a PMI of 52.5, comfortably above the national manufacturing average, while equipment manufacturing stood at 51.0 and consumer-goods manufacturing at 50.7. Twelve of the 21 industries included in the official survey were in expansion territory, four more than in August. A separate private-sector survey reinforced the positive signal: the RatingDog China Manufacturing PMI rose to 52.1 from 51.5, its strongest reading since April. That survey showed output and new business expanding at faster rates, while foreign orders increased at their quickest pace in seven months. Manufacturers even increased employment slightly in response to stronger workloads. The figures fit a broader regional pattern in which surging global spending on artificial intelligence infrastructure, data centres, advanced electronics and semiconductors is generating new demand throughout Asian manufacturing supply chains. China’s position across electronics, electrical equipment, industrial machinery and technology components allows parts of its industrial sector to benefit directly from this cycle.

Yet the headline PMI masks a much weaker domestic economic picture. Large manufacturers recorded a PMI of 50.6, but medium-sized firms remained in contraction at 49.7 and small companies at 48.9. Employment in the official manufacturing survey also remained below the expansion threshold. At the same time, manufacturers are facing a renewed rise in costs. The purchasing-price index for major raw materials jumped to 60.8 in September, while the factory-gate price index increased to 54.0, reflecting higher international commodity prices and stronger demand in some industries. Businesses may therefore face margin pressure if they cannot fully pass those higher costs on to customers. More broadly, domestic demand remains fragile. Retail sales increased only 0.4% year on year in August, while fixed-asset investment fell 7.2% during the first eight months of 2026. Manufacturing investment declined 2.3%, infrastructure investment fell 4.0%, and real-estate development investment plunged 19.9%. Those figures help explain why a stronger manufacturing PMI alone does not yet represent a comprehensive economic recovery.

The September improvement nevertheless gives policymakers some breathing room as China enters the final quarter of 2026. Economic growth slowed from 5.0% year on year in the first quarter to 4.3% in the second, leaving first-half growth at 4.7%. Beijing is targeting full-year growth of around 4.5% to 5%, making stabilization during the second half increasingly important. Authorities have consequently begun combining support for strategic industrial sectors with measures aimed at weaker parts of domestic demand, including cheaper central-bank financing for infrastructure and technology, expanded relending programs and mortgage-interest subsidies for first-time homebuyers. For the manufacturing recovery to become more durable, however, China will need more than continued AI-related external demand. A sustained improvement in household confidence, private investment, the property sector and smaller businesses would be necessary to turn September’s narrow industrial expansion into a broader economic recovery.