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Is China's Contracting PMI Just the Tip of the Iceberg?

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Part 2
Is China's Contracting PMI Just the Tip of the Iceberg? PART 2 OF 8

China’s Official Manufacturing PMI Fell Further in February

Meaning and importance of PMI

China’s manufacturing purchasing managers’ index (or PMI) is an economic indicator that provides a snapshot of the manufacturing sector of an economy. A reading above 50 indicates that the activity is expanding while a reading below 50 signals a contraction. PMI provides advanced insight as to how the manufacturing sector of the economy is performing.

The manufacturing PMI is based on five sub-indexes such as production index, new orders index, employed person index, main raw materials inventory index, and supplier delivery time index.

China’s Official Manufacturing PMI Fell Further in February

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Official manufacturing PMI fell in February

China’s official manufacturing PMI reading for February was down and came in at 49.0 as compared to 49.4 in January. The February reading was the lowest since November 2011. This index is released every month by the National Bureau of Statistics of China, and it mainly focuses on large Chinese companies.

The production index was 50.2, down from 51.4 recorded in January, which indicates that the production kept expanding while the growth rate slowed down. The new orders index was 48.6, down from 49.5 a month ago. It dropped below the threshold, showing that the demand in the manufacturing sector continues to decline.

The employed person index was 47.6, down 0.2% month-over-month, but it was still in the contraction range, indicating that the pace of decline of labor employment of manufacturing enterprises continued to decline at a slightly faster pace.

The main raw materials inventory index was 48.0, a rise of 1.2% over last month. This index continued to stay below the threshold, indicating that the raw material inventory declined but at a low pace. Meanwhile, supplier delivery time index fell from 50.5 in January to 49.8 in February, indicating that the delivery time of raw material suppliers has slowed down.

Impact on mutual funds

Persisting weakness in the manufacturing sector has negatively impacted the performance of China-focused mutual funds such as the Oberweis China Opportunities Fund (OBCHX) and the Matthews China Fund – Investor Class (MCHFX), which had exposure of 20.4% and 15.4%, respectively, to the industrials sector as of December 2015.

The above mutual funds are invested in stocks of companies like Tencent Holdings Limited (TCEHY), JD.com (JD), Vipshop Holdings (VIPS), and NetEase (NTES). The performance of these companies has been adversely impacted due to weak global demand and uncertain economic outlook.

In the next article, we will look at China’s official non-manufacturing purchasing managers’ index.

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