China’s PMI falls to four month low in February, but recovery remains backed by strong unchanged fundamentals.
China’s manufacturing PMI for February came out much lower than expected. While the value is close to the neutral 50 mark, economist believe underlying fundamentals for recovery remain intact. While not all economies are driven by their manufacturing sectors, gauging the level of growth within the sector acts as a proxy for the economy as a whole. In the case of China, which earned its position as the world’s factory, the manufacturing sector is key in gauging the health of its economy.
The HSBC PMI indices are compiled by HSBC and Markit and cover several emerging markets. Their scales range from 0 to 100, with 50 representing the neutral point, values above signifying expansion and values below signifying contraction. The latest value posted was 50.4 versus an expected 52.2, which would have been in line with January. At first impression this would send a strong negative short term signal to investors, but the fundamentals for recovery over the medium to long term are still present. Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said:
“The Chinese economy is still on track for a gradual recovery. Despite the moderation of February’s flash PMI, the index recorded the fourth consecutive reading above the 50 critical line. The underlying strength of Chinese growth recovery remains intact, as indicated by the still expanding employment and the recent pick-up of credit growth.”
Investors in China focused ETFs, such as FXI, MCHI or the Hong Kong focused EWH, should take note that the latest reading is likely just one negative blip in a recovery trend rather than a trend reversal. Very short term investors could see it as a signal to sell, but investors with an investment horizon of at least six months to a year may find comfort in the underlying strong unemployment metrics and expansion of credit. Investors in the usual emerging market ETFs (e.g. VWO, EEM) should also keep in mind their very large exposure to China and Asian equities in general.