Downturn in China’s manufacturing sector
The Caixin China Manufacturing PMI (Purchasing Managers’ Index) rose to 49.7 in March—the index’s highest reading in the past 13 months—from 48.0 in February, indicating a slight deterioration in operating conditions faced by Chinese manufacturers. The renewed expansion in total new order books led to the first increase in output in 2016.
Importantly, the reading is below the 50 mark, which indicates that manufacturing activity is still contracting. The Caixin Manufacturing PMI focuses more on small- and medium-sized private firms, which have been adversely impacted by the economic slowdown and high financing costs.
Commenting on the China General Manufacturing PMI data, Caixin Insight Group Chief Economist He Fan pointed out that the March index reading was still “up 1.7 points from the reading for February” and that “all categories of the index showed improvement over the previous month.”
Fan noted that “the output and new order categories rose above the neutral 50-point level, indicating that the stimulus policies the government has implemented have begun to take hold.” Fan also suggested that “considering that current conditions remain uncertain, the government needs to continue with moderate stimulus measures to reinforce market confidence.”
Total new orders, new export orders
Production increased for the first time in March 2016, albeit at a marginal pace. The higher output was supported by a renewed rise in total new work due to improvement in client demand. But weak foreign demand remained a drag on new order growth, and new export business was down for the fourth month in a row.
The lower employment level was attributed to company downsizing policies that were implemented to cut costs. Higher new orders and lower staff numbers both contributed to a slight increase in the unfinished work in March. The upturn in workloads resulted in higher purchasing activity for the first time since June 2015. Manufacturers reported higher raw material prices for the first time since July 2014, although the overall growth rate of inflation was modest. In line with higher production costs, firms raised their prices charged in March, though modestly.
Manufacturers reported higher raw material prices for the first time since July 2014 though the overall growth rate of inflation was modest. In line with higher production costs, firms raised their prices charged in March, although modestly.
Impact on mutual funds
Still, the slump in China’s manufacturing sector is deeply rooted. A small rise in its PMI will not have much impact on China-focused mutual funds such as the Oberweis China Opportunities Fund (OBCHX), the Matthews China Fund Investor Class (MCHFX), and the Guinness Atkinson China and Hong Kong Fund (ICHKX), which have exposure to industrials sector in the range of 20%–14%. However, this small rise shows that the Chinese government’s aggressive stimulus reforms are starting to put the staggering economy back on track for growth.
With the uptick in the factory output, companies such as Taiwan Semiconductor Manufacturing (TSM), China Mobile (CHL), CNOOC (CEO), and Tencent Holdings (TCEHY) may see rises in their revenues in coming months. And since the aforementioned mutual funds are invested in these companies, they would be positively impacted.
Now let’s analyze China’s official non-manufacturing PMI and its impact on related mutual funds.