China’s official April manufacturing PMI was 50.3, while the services PMI fell below 50 and the construction PMI dropped to a six-year low of 48. This points to weaker domestic demand and continued softness in housing-related activity.
External demand was expected to support activity, with global demand for AI and semiconductor-related products remaining firm. Industrial production growth was forecast to rise to 6.2% year on year and export growth to 12% year on year.
External Strength Domestic Weakness
Fixed asset investment growth was projected to stay at 1.6% year on year in 4M-2026, supported by equipment manufacturing and infrastructure. Retail sales and credit growth were expected to improve modestly, while overall investment remained subdued.
Higher international oil prices were expected to lift producer prices and energy CPI. Policy measures were reported to have limited the pass-through into domestic prices, while headline CPI was expected to hold at 1% year on year as higher energy inflation offset lower food inflation.
Given the split between strong external demand and a soft domestic economy, we should anticipate increased volatility in Chinese assets. The robust manufacturing PMI of 50.3 is being driven by exports, while the services PMI falling below 50 and a six-year low in construction PMI signals significant internal weakness. This suggests a strategy of being long on export-oriented tech sectors while remaining cautious or short on domestic-facing industries like real estate.
The projected 12% year-on-year growth in exports, fueled by global AI and semiconductor demand, presents a clear opportunity. Recent earnings from global chip leaders have consistently beaten expectations throughout early 2026, reinforcing the strength of this trend. Therefore, we should consider buying call options on tech-heavy indices like the ChiNext or specific semiconductor ETFs to gain exposure to this durable export strength.
Positioning For Volatility
Conversely, the deepening slump in the property market, evidenced by the construction PMI hitting 48, warrants a bearish stance on related assets. Fixed asset investment growth remains extremely weak at a projected 1.6%, and news of property developer Country Garden again delaying a coupon payment in late April has done little to restore confidence. Buying put options on real estate ETFs or shorting futures on industrial commodities like iron ore could hedge against further domestic deterioration.
The divergence between rising energy costs and muted headline inflation of 1% creates a complex picture for the broader market. While international Brent crude prices have climbed back over $95 a barrel, weak consumer demand is preventing companies from passing these costs on, which will squeeze corporate profit margins. This environment gives the central bank room to ease policy, which could weaken the yuan but support government bonds.
When we look back at the economic data from 2025, we saw a similar pattern where initial export strength masked underlying domestic issues for a couple of quarters before the market corrected. History suggests that such a two-speed economy is not sustainable. We must be prepared for the moment when domestic weakness eventually weighs on the positive export story or government stimulus finally kicks in.
This clear divergence in economic data suggests that overall market direction is uncertain, making volatility itself the most attractive asset to trade. We should consider buying straddles or strangles on broad indices like the FTSE China A50 Index. This positions us to profit from a significant price move in either direction, which seems likely in the coming weeks as these conflicting economic forces resolve.
