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Recovery in China's PMI, but Can Industrial Profits Hold Strong?

PART:
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Part 2
Recovery in China's PMI, but Can Industrial Profits Hold Strong? PART 2 OF 6

Expansion in China? March’s Official Manufacturing PMI

The meaning and importance of PMI

China’s manufacturing PMI (Purchasing Managers’ Index) is an economic indicator that provides a snapshot of the manufacturing sector of an economy. A PMI reading above 50 indicates that activity is expanding, whereas below 50 signals a contraction. Manufacturing PMIs are based on five sub-indices:

  • production
  • new orders
  • employed persons
  • main raw materials inventory
  • supplier delivery time

Expansion in China? March&#8217;s Official Manufacturing PMI

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China’s official manufacturing PMI for March

China’s official manufacturing PMI reading for March was up, coming in at 50.2 compared to 49.0 in February, after consecutive eight months of decline. The index is released every month by China’s National Bureau of Statistics, and it mainly focuses on large Chinese companies. The rise in PMI indicates that China’s manufacturing sector is picking up, but it can also be seasonal in nature. It’s argued that the Chinese government may have to provide stimulus continuously to reinforce investor confidence in the economy.

Meanwhile, China’s production index climbed to 52.3 in March, up from 50.2 in February, indicating a further increase in production activities. The new orders index rose to 51.4, up from 48.6 one month previously—and now above the threshold—showing that demand has ticked up the manufacturing sector.

By contrast, the employed persons index and main raw materials inventory index stayed below the threshold at 48.1 and 48.2, respectively, but the supplier delivery time index reached 51.3—higher than the threshold—indicating that the delivery times of raw material suppliers is speeding up.

Impact on mutual funds

Let’s not forget that China’s manufacturing sector is neck deep in the slowdown. So just one uptick in PMI is not going to have much of an impact on the overall performance of China-focused mutual funds like the Oberweis China Opportunities Fund (OBCHX) and the Matthews China Fund Investor Class (MCHFX), which had exposures to 20.4% and 15.4%, respectively, to the industrials sector as of December 2015.

The above mutual funds are invested in the stocks of companies such as Tencent Holdings (TCEHY), JD.com (JD), Vipshop Holdings (VIPS), and NetEase (NTES). The performance of these companies has been adversely impacted due to sluggish global demand.

In the next part, we’ll look at the Caixin China Manufacturing Purchasing Managers’ Index.

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