Downturn continues in China’s manufacturing sector
China’s Caixin Manufacturing PMI (Purchasing Managers’ Index) fell to 49.4 in April from 49.7 in March. This indicated further deterioration in the manufacturing sector with worsened operating conditions faced by Chinese manufacturers. A renewed expansion in total new order books led to the first increase in output in 2016.
The reading is below the 50 mark, which indicates that manufacturing activity is contracting. The Caixin Manufacturing PMI focuses on small-to-medium-sized private firms that are adversely impacted by an economic slowdown and high financing costs.
Commenting on China’s General Manufacturing PMI data, He Fan, chief economist at Caixin Insight Group, said, “All of the index’s categories indicated conditions worsened month-on-month, with output slipping back below the 50-point neutral level. The fluctuations indicate the economy lacks a solid foundation for recovery and is still in the process of bottoming out. The government needs to keep a close watch on the risk of a further economic downturn.”
Total new orders stagnated, new export orders fell
Relatively weak market conditions and softer client demand led companies to be cautious about their production schedules. Weak foreign demand remained a drag on new order growth, and the new export business declined for the fourth month in a row. New orders stagnated in April, and new export orders fell for the fifth straight month. Stagnant new orders led to a renewed fall in purchasing activity in April and a decline in overall employment.
Average input cost rose in April for the second month. Inflation rose at the fastest rate since January 2013. Overall costs increased, and companies passed on increased input prices to customers, which made output costs rise.
Impact on funds
The slump in China’s manufacturing sector is deep-rooted due to weak domestic and global demand. The Chinese government is implementing aggressive stimulus reforms to put the staggering economy back on a growth track.
With the slowdown in factory ouput, companies such as Taiwan Semiconductor Manufacturing (TSM), China Mobile (CHL), CNOOC (CEO), and Tencent Holdings (TCEHY) may see their revenues take a hit in the coming months.
Investors can get exposure to Chinese stocks through mutual funds and ETFs. Mutual funds include the Oberweis China Opportunities Fund (OBCHX) and the Matthews China Investor Fund – Class A (MCHFX). ETFs include the Deutsche X-trackers Harvest CSI 300 China A (ASHR) and the iShares MSCI China (MCHI). These funds provide exposure to Chinese stocks.
In the next article, we’ll analyze China’s official non-manufacturing PMI and the impact on mutual funds.