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Why China’s Official Non-Manufacturing PMI Was Down in February

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Meaning and importance of PMI

China’s official non-manufacturing purchasing managers’ index (or PMI) is an economic indicator that provides a snapshot of the non-manufacturing sector of an economy. It provides advanced insight to how the service sector of the economy is performing. A reading above 50 indicates that the activity is expanding while a reading below 50 signals a contraction. The National Bureau of Statistics of China releases the data every month.

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China’s official non-manufacturing PMI includes ten sub-indexes. They include the business activity index, the new orders index, the new export orders index, the in-hand orders index, the stock index, the input price index, the sales price index, the employment index, the supplier delivery time index, and the business activities expectation index.

Official non-manufacturing PMI

China’s official non-manufacturing PMI fell further in February. The reading for January came in at 52.7, the lowest since 2008 and down from 53.5 in January. The February reading came above the neutral reading of 50 and continued to be in the expansion range, but the growth rate has slowed down.

The new orders index was down by 0.9% over the previous month to 48.7, indicating that the market demand of the non-manufacturing industry decreased. The input price index was up by 0.6% over last month to 50.5, indicating that the input price during the process of production and operation of non-manufacturing enterprises rose.

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The sales price index was 48.3, 0.6% higher than it was last month, indicating that the overall level of non-manufacturing sales price continued to drop although at a slower pace. The employment index was 48.9, which increased 0.1% over the previous month, indicating the labor employment of non-manufacturing enterprises continued to decrease. The business activities expectation index of 59.5 went up by 1.1% over the last month and continued to be positioned in the high level of the range.

Impact on mutual funds

The prolonged weakness in the manufacturing sector has now spilled over to the service sector. The non-manufacturing PMI data indicates that the service sector may not be able to sustain the economic slump in the near term. Thus, the performance of China-focused mutual funds such as the AllianzGI China Equity Fund–Class A (ALQAX) and the Eaton Vance Greater China Growth Fund–Class A (EVCGX) may be adversely impacted with the slump in the non-manufacturing sector. These two funds have a combined exposure of 66.8% and 75.8%, respectively, to the financials, information technology, telecommunication services, and healthcare sectors as of December 2015. These funds are invested in service companies such as Sina (SINA), JD.com (JD), Lenovo Group (LNVGY), Baidu (BIDU), and NetEase (NTES).

In the next article, we will look at the Caixin China Manufacturing PMI.

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