August manufacturing PMI shows demand recovery, but SMEs and employment remain under pressure — Structural observations on China's manufacturing recovery

Demand-side marginal improvement, but the foundation for recovery still needs consolidation

In August 2026, China's Manufacturing Purchasing Managers' Index (PMI) came in at 49.8%, up 0.6 percentage points from the previous month. Although it remained in contraction territory, the contraction narrowed significantly. More notably, the new orders index rose sharply by 2.1 percentage points to 50.6%, returning to expansion territory. The production index also edged up to 50.4%, indicating that manufacturing production activities have accelerated somewhat. This combination suggests that, after a period of inventory destocking and weak demand, China's manufacturing sector is witnessing positive demand-side marginal changes.

However, a single month's data rebound is not yet sufficient to confirm a trend reversal. Although the composite PMI output index rebounded by 0.2 percentage points to 49.5%, it remained below the boom-bust line, indicating that overall economic output sentiment remains weak. The rebound in the manufacturing PMI was driven more by new orders, while the recovery on the production side was relatively moderate. This may imply that companies remain cautious about the sustainability of the demand recovery and tend to digest inventories rather than rapidly expand production.

Structural divergence: large enterprises and high-tech manufacturing lead, while SMEs and employment remain under pressure

One of the most prominent features of this PMI release is structural divergence. By enterprise size, the PMI for large enterprises stood at 50.6%, up 1.1 percentage points from the previous month, returning to expansion territory; the PMI for medium-sized enterprises was 49.4%, down 0.3 percentage points month-on-month; the PMI for small enterprises was 47.9%, up 0.5 percentage points, but it has remained in contraction territory for several consecutive months. Large enterprises, by virtue of stronger risk resilience and policy support, have taken the lead in emerging from the trough, while small and medium-sized enterprises, especially small ones, continue to face multiple pressures such as insufficient demand, high costs, and financing constraints.

From an industry perspective, the PMI for equipment manufacturing was 51.4%, and that for high-tech manufacturing was 52.9%, both higher than the overall manufacturing level and remaining in expansion territory. In contrast, the PMI for high-energy-consuming industries was only 47.9%, and the PMI for the consumer goods industry was 49.0%. This divergence clearly illustrates the structural transformation underway in China's manufacturing sector: new quality productive forces, represented by high-end equipment, electronic communications, new energy, and industrial software, are becoming the core engine of manufacturing growth; while traditional high-energy-consuming industries are in a contraction channel under capacity adjustment and environmental constraints. Although the consumer goods industry rebounded somewhat, it remains below the boom-bust line, reflecting that the repair of domestic consumption still needs to be strengthened.

The employment index is another indicator warranting vigilance. The manufacturing employment index stood at 48.7%, down 0.3 percentage points from the previous month, continuing its contraction trend; the non-manufacturing employment index was 45.4%, unchanged from the previous month, indicating that overall employment sentiment remains weak. Historically, the PMI employment index tends to lag behind production and new orders. If the demand recovery persists, employment indicators are expected to improve in the coming months. However, the current employment pressure implies that the breadth of the manufacturing recovery is insufficient, and the operational difficulties of small and medium-sized enterprises may continue to weigh on job creation.## Price Signals: Upstream Cost Pressures Rise, Mid- and Downstream Profitability Faces Tests

In August, the PMI price sub-indices rebounded significantly. The purchasing price index for major raw materials in manufacturing was 56.6%, up sharply by 3.4 percentage points; the ex-factory price index was 50.4%, up 2.6 percentage points, returning to the expansion zone after several months of contraction. This indicates that the rise in upstream raw material prices (such as crude oil, non-ferrous metals, etc.) has begun to transmit to the ex-factory stage of industrial products.

From the perspective of industrial transmission, the increase in raw material prices is much higher than that of ex-factory prices, implying that the stronger pricing power of upstream enterprises is squeezing the profit margins of mid- and downstream manufacturing. For midstream industries such as automobiles, home appliances, and machinery, rising raw material costs may erode already thin profit margins; for downstream consumer goods industries, although ex-factory prices have rebounded somewhat, if the recovery of terminal demand is insufficient, the ability to pass on costs is limited, and corporate profits will continue to face pressure. This price structure may further intensify the divergence in prosperity across different links and affect inventory strategies and purchasing decisions in the supply chain.

Notably, both the purchasing price index and ex-factory price index for the smelting and rolling of non-ferrous metals rose above 60%, indicating a tight market for metal raw materials. This may be related to the strong demand for metals such as copper, aluminum, and lithium driven by the global energy transition, electric vehicles, and energy storage industries, and also echoes the volatility of international commodity prices.

Non-Manufacturing: Services Stable but Internally Divergent, Construction Disrupted by Weather

In August, the non-manufacturing business activity index was 49.0%, unchanged from the previous month. The services business activity index was 49.3%, generally stable, but with notable divergence among sub-sectors: industries such as postal services, telecommunications, broadcasting, television and satellite transmission services, internet software and information technology services all had prosperity indices above 55.0%, reflecting the vitality of the digital economy and logistics; while wholesale, retail, and capital market services were in contraction, indicating sluggishness in traditional consumption-related services and corporate financing activities.

The construction business activity index was 46.9%, down slightly by 0.1 percentage points month-on-month, clearly in the contraction zone. The official interpretation attributes this to the impact of extreme weather such as heavy rainfall and typhoons in some regions. However, from a broader perspective, the slowdown in real estate investment and infrastructure construction remains the fundamental drag on the construction sector. Although the business activity expectations index for construction was 51.8%, unchanged from the previous month, indicating moderately positive corporate expectations, weak orders and new starts may continue to constrain the sector's recovery.

Future Supply Chain Implications and Outlook

The August PMI data reveals several signals with important implications for the future direction of the supply chain:First, the new orders index returned to expansion territory. If this trend is consolidated in the coming months, it will mean that the manufacturing destocking cycle is nearing its end, and companies may begin entering a restocking phase. This will positively drive orders across upstream raw materials, midstream components, and downstream end products. In particular, industries where both the new orders and production indices are above 53%, such as electrical machinery and computer, communication, and electronic equipment, are expected to become the leaders in a new round of demand recovery.

Second, the continued expansion of high-tech manufacturing and equipment manufacturing indicates that the structural adjustment of China's manufacturing sector is accelerating. Fields such as semiconductors, industrial automation, new energy equipment, and high-end precision manufacturing will continue to enjoy dual dividends from policy and the market. This trend will strengthen China's industrial positioning in the global supply chain and, amid supply chain diversification waves such as "China+1," consolidate China's competitiveness in core manufacturing links.

Third, rising upstream raw material prices may trigger changes in supply chain cost management strategies. Midstream and downstream enterprises will become more proactive in procurement, inventory management, and hedging, while possibly accelerating the search for substitute materials or promoting technological upgrades to reduce unit energy consumption and raw material dependence. Fluctuations in some raw material prices may also affect the competitiveness of export products, requiring close attention to changes in international market demand.

Fourth, the persistently weak employment index indicates that the recovery is not broadly shared. Small and medium-sized enterprises, especially small enterprises, still face severe survival conditions under financing, order, and cost pressures. If this structural shortcoming is not addressed, it may affect overall consumption capacity and the domestic demand cycle. Future policies may need to focus on targeted support for SMEs to consolidate the emerging momentum of demand recovery.

Overall, the rebound in the August PMI brings a positive signal for China's manufacturing sector, but the structural divergence in the data warns us that the foundation of the recovery is not yet solid. From production to demand to prices, this round of repair is more likely the result of policy support and the co-movement of localized industry prosperity than a comprehensive and robust endogenous rebound. For enterprises across the industrial chain, seizing the structural opportunities of high-end manufacturing and industrial upgrading while remaining vigilant against rising costs and demand fluctuation risks will be key in formulating strategies for the next stage.