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Is There Hope for China's Stagnant Manufacturing Sector?

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Part 2
Is There Hope for China's Stagnant Manufacturing Sector? PART 2 OF 7

China’s Official Manufacturing Data Remained Unchanged in May

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 the country’s economy. A reading of above 50 indicates that activity is increasing, while a reading of below 50 indicates a reduction in activity.

The manufacturing PMI is based on five subindexes: the production index, the new orders index, the employed person index, the main raw materials inventory index, and the supplier delivery time index.

China&#8217;s Official Manufacturing Data Remained Unchanged in May

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Official manufacturing PMI was unchanged in May

China’s official Manufacturing PMI expanded slightly in May 2016 and came in at 50.1, the same as in April. This index is released every month by China’s National Bureau of Statistics, and it mainly focuses on large Chinese companies.

The data indicate that China’s manufacturing sector is still struggling to gain traction. Thus, either the government will have to provide further stimulus, or the impact of the government’s economic stimulus measures has yet to become apparent.

The output subindex rose to 52.3 compared to 52.2 in April, indicating that production continued to grow steadily despite the government’s efforts to curb the overcapacity plaguing sectors such as steel and coal. Total new orders expanded at a slower pace, while growth in export orders slowed.

Factories continued to shed jobs, albeit at a slower pace, and the employment subindex was 48.2 in May compared to 47.8 in April. Prices of raw materials continued to rise at a slower pace, and the speculative bubble deflated. The raw materials purchase price index was 55.3 in May, down from 57.6 in April.

Impact on funds

China’s manufacturing sector has been affected by overcapacity and the global slowdown. Marginal expansion in its PMI may not have a profound impact on the performance of China-focused funds such as the Oberweis China Opportunities Fund (OBCHX), the Matthews China Fund Investor Class (MCHFX), the iShares MSCI China ETF (MCHI), and the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR).

The above-mentioned mutual funds all have sizable exposures to the industrials sector. This shows that the slowdown in the manufacturing sector is so deep-rooted that even the government stimulus is showing mediocre results.

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

In the next article, we’ll look at the Caixin China manufacturing PMI.

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