China’s Purchasing Managers’ Indices (PMIs) for January have dropped. The Manufacturing PMI is now at 49.3, and the Non-Manufacturing PMI is at 49.4. This decline might lead to policy changes, such as interest rate cuts or adjustments to the reserve requirement ratio, especially if domestic growth doesn’t improve.
The construction sector is facing significant challenges, highlighted by a sharp fall in the construction PMI. Even with this overall disappointing trend, there are some bright spots in manufacturing. The input price index rose to 56.1, and the output price index increased to 50.6, marking its first rise since June 2024.
Policy Adjustments and Fiscal Deficit
We expect further policy changes soon, with forecasts suggesting that the fiscal deficit-to-GDP ratio could climb to 4.5% in the upcoming March National People’s Congress. Additionally, the overall fiscal deficit is anticipated to increase from 8.4% to 9.0%.
Reflecting on the weak January 2025 PMIs, there were clear signs of a slowing economy, particularly in construction. Readings below 50 indicated a need for government action to boost growth, setting the stage for a year of policy changes.
In 2025, authorities began to respond with measures to help the economy. The People’s Bank of China cut its one-year loan prime rate twice, bringing it down to 3.25% by the end of the year. They also reduced the reserve requirement ratio for banks in response to the weaknesses identified early in the year.
Now, in February 2026, the economic situation remains tough despite these stimulus efforts. While January’s industrial output saw a slight year-over-year increase of 3.5%, the property market remains a major worry, with new home prices declining again last month. The ongoing struggles in real estate suggest the earlier easing measures haven’t fully addressed the main issue.
Trading Strategies in a Volatile Market
For traders, this situation indicates continued weak demand for industrial metals related to construction. Strategies that take advantage of stagnant or declining prices for commodities like iron ore and copper might be beneficial in the coming weeks. Buying put options on commodity ETFs tracking these metals could be a smart move.
The pressure for more stimulus is increasing, which likely means more monetary easing is ahead. This could put more downward pressure on the Chinese yuan. We recommend going long on USD/CNH currency pairs or buying call options on USD/CNH to prepare for a weakening yuan.
Given the divide between struggling domestic sectors and stronger export-oriented industries, we expect continued volatility in Chinese equities. Using options on major Chinese stock indices, such as the Hang Seng, or ETFs like FXI, can help trade this uncertainty. A long straddle, which includes buying both a call and a put option, could profit from significant price movements in either direction.
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