Markit’s manufacturing PMI (purchasing managers’ index) for China, which is an indicator of the country’s economic health, came in at 48 (MCHI) (FXI) in February 2016. China’s manufacturing PMI fell from last month’s reading of 48.3. For the 12th consecutive month, the index reading was below 50, which is considered the neutral mark. A reading below 50 signifies contraction, while a reading above 50 signifies expansion.
New orders in February slipped to 48.3 from 48.5 in January. This marked the eighth straight month of contraction. Sluggish domestic demand, low demand from abroad, and years of overexpansion have weighed on China’s manufacturers. China’s broader economic growth has been dragged to 25-year lows.
Lunar New Year
The Lunar New Year holidays was in February this year. Chinese economic activity slows dramatically during the weeklong holiday. This was also one of the reasons for the drop in China’s PMI in February.
The Chinese economy’s focus is shifting from manufacturing to the service sector. China’s oil consumption primarily depends on its manufacturing activity. This is a major factor driving overall crude oil demand. In addition to February’s weak manufacturing data, many firms have initiated layoffs and cost cutting, which are signs of a bleak outlook for China’s manufacturing sector.
When crude oil demand falls, it negatively affects China’s crude oil imports and companies such as Frontline (FRO), Teekay Tankers (TNK), Tsakos Energy Navigation (TNP), Nordic American Tankers (NAT), DHT Holdings (DHT), Gener8 Maritime (GNRT), Navios Maritime Midstream Partners (NAP), and Euronav (EURN).
Persisting weakness in the manufacturing sector has negatively affected not only crude oil tankers but also China-focused mutual funds such as the Matthews China Fund Investor Class (MCHFX), which invests 15.4% of its holdings in the industrial sector. This mutual fund consists of companies such as Tencent Holdings (TCEHY), JD.com (JD), Vipshop Holdings (VIPS), and NetEase (NTES).