China’s PMI Softens, Markets Test Faith in Policy Support and Trade Truce

China’s factories expanded again in October, yet the pace cooled, reminding investors that the recovery remains fragile and policy dependent. The softening momentum feeds directly into global growth expectations and commodity demand, placing a spotlight on Beijing’s next support steps and the durability of the recent U.S.–China trade truce. The immediate question for markets is whether slower expansion is a pause before stimulus traction or the start of renewed downside pressure.

The private manufacturing gauge eased to 50.6 in October after printing 51.2 in September. While still above the 50 line that separates expansion from contraction, the deceleration signals weaker output and softer demand heading into the fourth quarter. Export orders slipped back into contraction as trade uncertainty returned, showing how sensitive the Chinese industry remains to global policy headlines.

Purchasing activity also slowed, and business confidence slipped to its lowest in six months, even if it stayed modestly positive. Only employment improved, rising slightly for the fastest pace of job creation in more than two years as new work inflows supported hiring. This divergence between hiring and broader activity suggests firms are preparing for incoming orders but remain cautious about inventory and capex.

The backdrop matters. China’s official PMI fell to 49.0 in October after posting 49.8 in September, marking seven straight months below the expansion line and reinforcing the view that recovery is shallow without policy follow-through. The temporary trade truce announced last week between President Trump and President Xi may cushion sentiment near term, yet the data confirm that manufacturers have not fully turned the corner.

Fiscal easing and targeted credit support have helped stabilize the floor, but evidence of accelerating final demand remains limited. Markets, therefore, continue to price Beijing’s readiness to step in with additional targeted measures, especially as global demand moderates and supply chains adjust.

Equity markets traded the data tentatively. Mainland A-shares opened firmer yet faded through the session as investors digested the softer momentum, leaving the CSI 300 marginally higher by roughly 0.2 percent on the close after gaining nearly 0.5 percent intraday. Offshore sentiment was more cautious, with the Hang Seng slipping about 0.4 percent as tech and cyclical names lagged. Global equities showed muted sympathy, with the S&P 500 ending roughly flat and European indices little changed, reflecting a market that sees China as stabilizing but not re-accelerating.

Rates markets leaned toward caution. Chinese 10-year government yields edged lower by nearly 3 basis points as traders priced higher odds of incremental easing. U.S. Treasuries saw modest safe-haven interest, with the 10-year yield down roughly 2 basis points and the front end anchored as investors balanced China data with the Federal Reserve’s steady policy stance. The curve flattened slightly as growth signals softened, reinforcing the link between global manufacturing cycles and term premia.

FX markets showed similar nuance. The yuan firmed mildly in early trading on trade-truce optimism, yet USD/CNY finished the session close to unchanged, just above the 7.30 mark. Dollar strength versus major peers kept DXY near recent highs, while commodity-linked currencies such as AUD edged lower by close to 0.3 percent, reflecting Australia’s export sensitivity to Chinese demand. The yuan’s stability suggests authorities remain comfortable guiding currency expectations while avoiding undue tightening of financial conditions.

Commodities reacted in line with a cooler growth tone. Brent crude eased by about 0.4 percent toward the 88 dollars per barrel area, while copper slipped close to 0.7 percent to roughly 3.65 dollars per pound as traders weighed softer Chinese growth momentum against supply risks. Gold held steady near 2,040 dollars per ounce as stable real yields and geopolitical hedging offset weaker Asian demand indicators. The moves underscored the cross-asset read: softer PMIs cap cyclical assets yet do not unwind defensive bids.

Base case: China delivers incremental policy support, the trade truce holds near term, and PMI readings hover around the expansion line through early next quarter. Confirmation would come from November PMIs, credit impulse data, and fiscal announcements over the next four to eight weeks. Medium term, investors look for stabilization in export orders and inventory restocking before positioning more aggressively in cyclicals.

Alternative case: external demand weakens further, policy traction disappoints, and official PMIs remain below 50 into year-end. In that scenario, yield curves would flatten more, commodity currencies face additional downside, and copper and oil could test lower ranges. Early warning signs would include weaker November and December export prints, rising jobless claims in coastal provinces, or renewed stress in small-enterprise financing channels.

For portfolios, the takeaway is to maintain balanced exposure to China-linked cyclicals while keeping hedges in place. The opportunity lies in selective Asia credit and oversold quality Chinese equities if policy support firms and export orders stabilize. The key risk is a prolonged stall in global trade that pushes PMIs lower. A material break below the 50 expansion line for private and official PMIs simultaneously would warrant reducing cyclical exposure and adding duration and quality defensives.