Morgan Stanley: Gap between China’s manufacturing investment and output growth widens as overcapacity risks continue to ease

Why does the widening gap between investment and output matter?

As of September 2026, cumulative manufacturing fixed-asset investment was down 2.1% year on year; nominal industrial output, calculated using the average year-to-date increase in PPI, rose 8.2% year on year. Morgan Stanley uses the latter as a proxy for industrial demand.
The difference between investment and nominal output growth fell to negative 10.3 percentage points, widening further from negative 10.2 percentage points a month earlier. Measured by their share of manufacturing liabilities, industries accounting for 86.4% saw slower capital expenditure, which Morgan Stanley believes supports a continued decline in overcapacity risks.

In September, PPI rose 5.0% year on year and 1.2% month on month, while year-on-year export growth accelerated to 36.3%; growth in manufacturing value added remained at 5.7% year on year. Morgan Stanley believes rising prices and strong exports together supported revenue.
Through September, manufacturing revenue rose 7% year on year on a year-to-date basis, while profits rose 17% year on year; despite higher costs from rapidly rising prices, the gross margin increased by 0.5 percentage points year on year.

Measured by their share of manufacturing liabilities, industries with improving profit trends accounted for 38.6% in September, up from 37% a month earlier; another 39.6% remained stable, while 21.8% deteriorated.
Pharmaceutical industry profit growth returned to around 4% after earlier consecutive declines and volatility, and Morgan Stanley moved the industry into the improving-profit category; profit growth in food manufacturing and printing slowed markedly compared with the second half of 2025 and the first half of 2026, and they were moved into the deteriorating-profit category.
Tobacco manufacturing profit growth has ranged from roughly negative 1% to positive 2% in recent months, better than the decline of around 8% in the first half of 2026; however, its investment-output growth gap has also risen steadily from negative 9 percentage points at the start of the year to near zero, and its capital expenditure trend was reclassified as stable.
Morgan Stanley believes that industries being at different stages of their cycles helps create more sustained credit demand and allows risks to be absorbed more smoothly.