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China’s July PMI Data: Mostly Better, but Stimulus Hopes Remain

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Part 2
China’s July PMI Data: Mostly Better, but Stimulus Hopes Remain PART 2 OF 5

China’s Official Manufacturing PMI in Contraction Mode in July

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 the economy. A reading above 50 indicates that manufacturing activity is expanding, while below 50 signals a contraction. It provides advanced insight into how the manufacturing sector of the economy is performing.

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

China’s Official Manufacturing PMI in Contraction Mode in July

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Official Manufacturing PMI ticked down in July

China’s official Manufacturing PMI for July came in at 49.9, down from 50.0 in June. The index is released every month by the National Bureau of Statistics (or NBS) of China and focuses on large Chinese companies. Weak PMI data were mainly due to massive floods in some parts of the country and weak demand. According to the NBS report, most of China’s cities and provinces had heavy rains from the “super El Niño effect.”

Production index declined to 52.1 in July from 52.5 in June, while the new orders index fell slightly to 50.4 from 50.5 a month ago. The new export orders index came in at 50.1, down from 50.2 in March.

So the government may have to continuously provide a stimulus to reinforce investor confidence in the economy.

Impact on funds

China’s manufacturing sector is affected by overcapacity and a global slowdown. The slowdown in the manufacturing sector is so deep-rooted that even the government stimuli are showing mediocre results.

A fall in PMI may have an adverse impact on the performance of China-focused funds such as the iShares MSCI China ETF (MCHI), the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR), the Oberweis China Opportunities Fund (OBCHX), and the Matthews China Fund – Investor Class (MCHFX), which have exposure to the industrials sector.

These funds are invested in 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 part, we’ll look at the China Caixin Manufacturing Purchasing Managers’ Index.

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