Purchasing Manager’s Indices (PMIs) can be useful leading indicators to predict the way an economy is trending. They are based on surveys of business managers with questions that compare the current state of the sector versus a previous period. For example, a typical key question could be ”Comparing against last month, is the level of business activity higher, lower or the same?”. A large number of responses are aggregated and quantified to gauge the change in sector sentiment against the previous period.
PMIs usually have scales ranging from 0 to 100, with any value below 50 meaning contraction and above 50 meaning expansion. The HSBC PMIs are a series of PMI indices focused on emerging markets, compiled by HSBC and Markit. Most of the HSBC PMIs focus on the manufacturing sector, though HSBC has developed both manufacturing and services sector PMIs for the BRIC countries (Brazil, Russia, India and China).
The graph above shows the most recent seasonally adjusted Manufacturing PMI for China. The index moved from a 50.5 in November to 51.5 in December. While the values are still modest within the expansion territory, this was the sharpest improvement over than past 19 months. Additionally, the value was the highest reading since May 2011. The data indicates that the Chinese manufacturing sector is back in expansion mode, and perhaps even accelerating growth.
The individual survey questions revealed that new orders have accelerated, driven by increased market demand. At the same time, new export orders have dropped, given weaker demand in Europe, Japan and the U.S. This is interesting since it shows that China’s internal demand is expanding, possibly faster than the rate at which the demand from its main trade partners is falling, allowing China to continue expanding despite weak global economics.
Implications for investors
The data is positive for investors in iShares FTSE China 25 Index Fund (FXI) as well as other Asia heavy emerging market ETFs, such as iShares MSCI Emerging Markets Index Fund (EEM) or Vanguard’s Emerging Markets ETF (VWO), which have holdings amounting to 19% and 18% invested in Chinese equities. As long as China’s internal demand can offset the global weakness, their economy should continue to grow. In addition, China will expand even more when global markets start to recover and its trading partners increase their demand for Chinese products. Investors should continue to watch the PMIs closely to check for a continuation of the trend. In the near term it seems that China is well poised for growth and this may have spillover effects for other Asian emerging economies as well.