China's Manufacturing PMI Impacted China-Focused Mutual Funds

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China's Manufacturing PMI Impacted China-Focused Mutual Funds PART 1 OF 6

Shanghai Stock Exchange on Roller Coaster in Week Ended January 7

SSE Composite Index fell 11.7%

The Shanghai Stock Exchange (or SSE) Composite Index was down by 11.7% from December 31, 2015, to January 7, 2016. It closed at 3,125.0 points after the People’s Bank of China (or PBoC) surprised the market by setting the official midpoint rate on the yuan, also known as the renminbi, at 6.5646 per dollar. This was its lowest point since March 2011.

In another important development, stock trading was halted by the automatic “circuit-breaker” for the second time since the start of 2016 due to panic selling. Chinese authorities recently implemented the circuit breaker mechanism to curb volatility in its stock markets.

Shanghai Stock Exchange on Roller Coaster in Week Ended January 7

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Yuan’s depreciation

The yuan’s depreciation could mean that the China’s economy is even weaker than it had seemed earlier. Investors fear that this could trigger a currency war among its trading partners.

Due to a capital drain from the country, China’s foreign exchange reserves can deplete quickly in an effort to support the yuan. China’s foreign reserves fell by $87.2 billion in November to $3.44 trillion, the lowest level since February 2013 and the third-largest monthly drop on record.

Oil price slid further

Oil prices tumbled to $32 per barrel—the lowest level in more than ten years—as China’s stock trading was halted for the second time in this week due to panic selling. This indicated that the Chinese economy could be in trouble, resulting in slowing energy demand from the world’s second largest economy.

From December 31, 2015–January 7, 2016, due to the oil price rout, the American depositary receipts (or ADRs) of Chinese energy companies fell. CNOOC Ltd (CEO) was down by 6.6% and China Petroleum & Chemical Corporation (SNP), also known as Sinopec Limited, fell by 10.5%.

Returns of China-focused mutual funds

From December 31, 2015–January 7, 2016, the Fidelity Advisor China Region Fund – Class A (FHKAX) turned out to be the worst performer, with a return of -9.9%.

The Neuberger Berman Greater China Equity Fund – Class A (NCEAX), the Guinness Atkinson China and Hong Kong Fund (ICHKX), and the Eaton Vance Greater China Growth Fund (EVCGX) were down by 9.8%, 8.4%, and 8.2%, respectively.

The US Global Investors China Region Fund – Investor Class (USCOX) posted the least negative return of -7.6% for the same period.

For the same period, the ADRs of Chinese tech giants such as JD.com (JD), Alibaba Group Holding Limited (BABA), and 58.Com Inc (WUBA) were down by 13.4%, 10.5%, and 7.0%, respectively.

In the next article, we will analyze China’s official manufacturing purchasing managers’ index.


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