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How Did China’s Service Sector Fare in March?

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Caixin China General Services Business Activity Index

China’s service sector expanded at a moderate pace in March. The Caixin China General Services Business Activity Index beat the neutral value of 50 to come in at 51.3 in March, which was slightly higher than the 51.2 reading in February. A reading below 50 indicates activity is contracting, while a reading above 50 indicates business activity is expanding.

There was an overall rebound in new business across the service sector in March. Furthermore, the latest increase in new orders was due to improving economic conditions. Modest growth in new work orders led services companies to take a cautious approach to adding new staff members. Hence, employment fell in the service sector in March for the first time since August 2013.

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Meanwhile, lower-than-expected sales resulted in a further decline in outstanding business across the service sector. Average input costs rose in the service sector, but the rate of inflation was modest. Although input costs increased, service sector firms reduced their selling prices in March amid reports of greater competition for new work.

According to the Dr. He Fan, chief economist at Caixin Insight Group, “Overall, the services sector developed well, but the economy is riding choppy waves, indicating the lack of a solid foundation for a recovery. The government needs to push forward with ‘supply side reform’ to encourage the development of emerging industries.”

Caixin China Composite PMI

The Caixin China Composite PMI (purchasing managers’ index), which covers both manufacturing and services, indicated a renewed increase in overall Chinese business activity in March. The Caixin Composite Output Index came in above the neutral 50.0 mark, rising from 49.4 in February to 51.3 in March. This was the highest reading in 11 months. The Composite PMI expanded due to a rebound in overall Chinese business activity, driven by slightly stronger growth in services activity and a renewed expansion of manufacturing output. New business rose at a modest rate at the composite level.

Employment fell slightly in the service sector in March for the first time since August 2013. Manufacturers also cut their payroll numbers in March, leading to the biggest drop in employment at the composite level since January 2009.

Overall, outstanding business increased marginally at the composite level in March for the first time in 2016. Further, input and output costs also rose at the composite level.

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Impact on mutual funds

China’s service sector has become a bright spot for the economy, which is helping to offset the slowdown in the manufacturing sector. In 2015, services accounted for 50.4% of China’s gross domestic product, up from 48.1% in 2014.

Financials, information technology, telecommunication services, and healthcare 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 exposure of 75.7% and 62.1%, respectively, to these sectors.

The growth in the service sector should eventually lead to a rise in business of service-oriented companies. Thus, the revenues and margins of companies such as China Biologic Products (CBPO), Baozun (BZUN), 58.com (WUBA), and Baidu (BIDU) should also rise. The above-mentioned mutual funds are invested in these companies.

For more updates on mutual funds, please visit Market Realist’s Mutual Funds page.

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