China’s manufacturing sector showed tentative signs of stabilization in December, expanding for the first time in eight months as new orders improved ahead of year-end holidays and construction firms rushed to complete projects. While the rebound offers a welcome reprieve after a prolonged slowdown, economists caution that the improvement remains fragile and may reflect short-term seasonal and policy-driven factors rather than a durable recovery in domestic demand.

The official manufacturing purchasing managers index rose to 50.1 in December, just above the threshold that separates expansion from contraction, according to data released by National Bureau of Statistics. A separate private-sector survey mirrored the same reading, reinforcing the view that activity modestly improved as 2025 drew to a close.

Orders and Production Improve Into Year-End

The pickup in factory activity was driven largely by stronger orders as manufacturers increased output ahead of the New Year and the Lunar New Year holiday period, which falls in mid-February this year. Many firms typically accelerate production before extended shutdowns, a pattern that appears to have supported December’s data.

Easing trade pressure also played a role. An extended truce in U.S.-China trade tensions reduced uncertainty for exporters, encouraging some inventory rebuilding. High-tech manufacturing remained a bright spot, with its PMI climbing to 52.5, reflecting continued strength in sectors aligned with Beijing’s industrial policy priorities. Equipment manufacturing and consumer goods production also edged into expansion territory at 50.4, suggesting a broader, though still modest, improvement.

Uneven Recovery Beneath the Headline Numbers

Despite the positive headline reading, the underlying picture remains uneven. Large manufacturers drove most of the gains, while activity among small and mid-sized firms stayed in contraction. These companies account for a significant share of employment and are more exposed to weak consumer demand and tighter margins, raising concerns about labor market stability.

A separate analysis by RatingDog indicated that although overall orders improved, new export orders slipped slightly and hiring weakened. Input costs, particularly for metals and other raw materials, continued to pressure margins. Some exporters raised prices for the first time in three months, highlighting a delicate balance between protecting profitability and sustaining demand in an increasingly competitive global environment.

Structural Challenges Continue to Weigh on Outlook

China’s broader economic backdrop remains complex. Growth this year is expected to come in just below the government’s target of around 5%, supported by exports and advanced manufacturing, but weighed down by a prolonged property sector downturn and industrial overcapacity. Price wars in sectors such as automaking underscore the challenges facing producers struggling to absorb excess supply.

Economists remain cautious about the sustainability of the December rebound. Capital Economics noted that the upturn appears partly linked to a modest increase in government spending, rather than a fundamental improvement in private-sector demand. Without stronger stimulus or a recovery in household consumption, momentum could fade in early 2026.

What Investors and Policymakers Should Watch Next

Looking ahead, the key question is whether December’s improvement marks the start of a gradual normalization or a temporary pause in a longer slowdown. Indicators to monitor include export orders after the holiday period, employment trends among smaller manufacturers, and policy signals from Beijing on fiscal and property-sector support. For now, China’s factories have stepped back into expansion, but the durability of that step remains far from assured.