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Caixin China Composite PMI: Reduced Business Activity in December

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Jan. 11 2016, Updated 10:28 a.m. ET

Caixin China Services PMI

China’s service sector companies saw a decline in business activity. Although the Caixin China General Services Business Activity Index rose above the neutral 50.0 value to 50.2 in December, it was down from 51.2 in November. A reading below 50 indicates activity is contracting while one above 50 indicates expansion.

In the service sector, new orders rose slightly in December, but this growth was one of the weakest historically. Despite slower growth in business activity, service companies continued to add to their payroll numbers in December. The rate of job creation was modest overall and was linked by panelists to ongoing company expansion plans.

Backlogs of work were little changed across China’s service sector in December. Softer client demand and greater competition for new business contributed to further falls in average tariffs set by services companies.

Service sector companies in China expressed a relatively low level of optimism toward the 12-month business outlook in December.

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Caixin China Composite PMI

Caixin China Composite PMI data (which covers both manufacturing and services) signaled renewed contraction of business activity in December. The Caixin Composite Output Index stood at 49.4 in December, below the neutral 50.0 value and also down from November’s reading of 50.5.

The overall Chinese business activity contracted in December as both manufacturing and service sectors were impacted by subdued client demand. Meanwhile, composite employment fell for a seventh successive month due to lower recruitment at factories. Increased competition for new work in services as well as manufacturing sector resulted in a sharp reduction in selling prices and thus, output prices fell at a solid pace at the composite level.

Impact on mutual funds

Financials, information technology, telecommunication services, and healthcare are four major service areas and the AllianzGI China Equity Fund – Class A (ALQAX) has combined exposure of ~70% to these sectors. While other three funds—the US Global Investors China Region Fund – Investor Class (USCOX), RS China Fund – Class A (RSCHX), and the AC One China Fund – Investor Class (ACOCX)—have combined exposure of 53.3%, 6.5%, and 60.1%, respectively.

A marginal rise in new orders in the service sector is a positive sign. However, at the composite level, a picture of the Chinese economy looks pretty bleak, which may impact the performance of the mutual funds.

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

In the next article, we will look at Westpac MNI Consumer Sentiment Indicator.

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