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How Did Caixin China Services and Composite PMI Trend?

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Caixin China Services PMI

After recording a strong start in January, growth momentum softened across China’s service sector with business activity expanding at a moderate pace. The Caixin China General Services Business Activity Index came in above the neutral 50.0 value at 51.2 in February, which was down from 52.4 in January. A reading below 50 indicates activity is contracting while a reading above 50 indicates expansion.

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The growth in new business was slow across the service sector in February after a solid rise in January. Furthermore, the latest increase in new orders was weaker than the long-term trend with some panellists commenting on the relatively subdued client demand. The decline in business activity and new work orders led to a slower increase in employment. Meanwhile, the level of outstanding business at service providers fell in February.

According to He Fan, chief economist at Caixin Insight Group, “Overall, the services sector has outperformed manufacturing industries, reflecting continued improvement in the economic structure. While implementing measures to stabilize economic growth, the government needs to push forward reform on the supply side in the services sector to release its potential.”

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Caixin China Composite PMI

Caixin China Composite PMI data, which covers both manufacturing and services, indicated a renewed fall in total Chinese business activity in February after stabilizing in January. The Caixin Composite Output Index stood at 49.4 in February, below the neutral 50.0 value and down from 50.1 in January.

The contraction in the manufacturing sector with the drop in new orders and production in factories, coupled with slower business growth in the service sector, led to the overall unchanged business at the composite level.

The slower increase in employment in the service industries while job shedding intensified across production units, leading to a decline in employment rate at a composite level. The softer growth of the service sector input prices combined with a solid reduction in manufacturers’ costs led to the fall in output prices at a marginal pace at the composite level.

Impact on mutual funds

Financials, information technology, telecommunication services, and health care are four major service sectors. As of December 2015, the Columbia Greater China Fund–Class A (NGCAX) and the China Clough Fund–Class A (CHNAX) had combined exposure of 75.7% and 62.1%, respectively, to these sectors.

Slow growth in the service sector led to slow growth in revenues and margins of companies such as China Biologic Products (CBPO), Baozun (BZUN), 58.com (WUBA), and Baidu (BIDU), which all make up part of the above mutual funds.

In the next article, we will look at China’s MNI Business Sentiment Indicator.

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