China’s manufacturing purchasing managers’ index (PMI) fell to 49.3 in January, indicating a contraction and missing expectations. The non-manufacturing PMI also dropped to 49.4, reaching a 37-month low. This suggests ongoing domestic challenges despite some improvement in external conditions. For the manufacturing sector, the PMI has been contracting for nine of the last ten months. Key sub-indices weakened, with new orders at 46.1 and export orders at 46.9, both lower than in December.

Service Sector Strategy

China plans to enhance service consumption and quality to boost domestic demand. Future improvements in the service sector may be reflected in upcoming non-manufacturing PMI data. The January PMI data showed a contraction at 49.3, significantly lower than expected. This weak start, along with the non-manufacturing PMI hitting a 37-month low, indicates that China’s domestic economy is facing more challenges than anticipated. The drop in new orders to 46.1 is particularly concerning for the upcoming quarter. However, it’s important to note that the Caixin Manufacturing PMI, which surveys smaller private firms, rose slightly to 50.8 in January. This suggests that, while state-owned enterprises are struggling, some private sector areas are performing better. This mixed picture indicates that targeted investments could be more effective than broad pessimistic strategies on the entire Chinese economy. The weakness in Chinese manufacturing poses a direct threat to the demand for industrial commodities. With LME copper prices around $8,600 per tonne, there is a strong case for buying put options to protect against a possible drop to the $8,200 support level observed in late 2025. Similarly, iron ore prices, which fell over 9% in January, appear at risk of further declines.

Australian Market Impact

The Australian dollar is particularly vulnerable due to Australia’s heavy reliance on exports to China. After record iron ore shipments to China at the end of 2025, this new data raises significant doubts about future demand. We are now considering shorting AUD/USD futures, as the currency often reflects Chinese economic sentiment. We should also keep an eye on policy responses. The People’s Bank of China recently reduced the bank reserve requirement ratio by 50 basis points to inject liquidity. This stimulus may take time to have an effect and could eventually support the services sector later this year. For now, the market views this as a reaction to weakness rather than a proactive measure for growth. The uncertainty from this data creates opportunities for volatility. The contrast between weak official data and stronger private sector surveys, coupled with policy stimulus, suggests potential sharp movements in the market. Therefore, we are thinking about buying call options on the VIX, as any further negative news from China could lead to a significant risk-off response in global equity markets. Create your live VT Markets account and start trading now.

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