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Caixin China Composite PMI Falls at Fastest Rate since Early 2009

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Caixin China Services PMI

China’s service sector companies saw marginal expansion in business activity. The Caixin China General Services Business Activity Index was above the neutral 50.0 value at 50.5 in September, although it was down from 51.5 in August. A reading below 50 indicates activity is shrinking while one above indicates expansion.

New orders rose slightly in September and as a result employment was up in the service sector. Further, softer growth in new work enabled service sector firms to complete their unfinished business in September, leading to a reduction in backlogs. Average input cost rose while selling price fell quickly in the service sector due to weak customer demand.

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Caixin China Composite PMI

The Caixin China Composite PMI data, which covers both manufacturing and services, pointed to a renewed fall in overall Chinese business activity in September. The Caixin Composite Output Index stood at 48.0 in September—below the neutral 50.0 value—down from 48.8 in August. It signaled the fastest rate of contraction since January 2009.

Total business activity declined steeply, primarily due to a contraction in manufacturing output. Factories cut jobs at a faster rate, and employment at the composite level declined for the fourth consecutive month.

Impact on mutual funds

Financials, information technology, telecommunication services, and healthcare are four major service areas in which the four mutual funds under review are heavily invested. These mutual funds are the Clough China Fund – Class A (CHNAX), the Fidelity China Region Fund — Class C (FHKCX), the John Hancock Greater China Opportunities Fund — Class A (JCOAX), and the Matthews China Fund — Investor Class (MCHFX).

As of August 31, 2015, the John Hancock Greater China Opportunities Fund — Class A (JCOAX) fund has the highest total exposure of 70.3% to the above-mentioned four sectors. It stands to gain the most from the rise in the service sector index. An improvement in service sector activity is a positive sign and favorably impacts the mutual funds’ performance.

The aforementioned mutual funds invest in American depositary receipts (ADRs) of Chinese technology companies such as China Biologic Products Inc. (CBPO), Alibaba Group Holding Limited (BABA), Baozun Inc. (BZUN), 58.com (WUBA), and Baidu Inc. (BIDU). These companies may see some improvement in their revenues due to a slight uptick in new orders in the service sector.

In the next article, we will look at China’s industrial profits.

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