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Why China’s Official Non-Manufacturing PMI Slowed in April

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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 into the non-manufacturing sector of an economy. It tracks the business activities of the service sector and construction industry.

A reading above 50 indicates that activity is increasing, while a reading of below 50 signals a reduction in activity. This PMI is released every month by China’s National Bureau of Statistics.

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China’s official non-manufacturing PMI includes ten subindexes. They are 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.

The non-manufacturing PMI covers services including the retail, aviation, software, real estate, and construction sectors.

Official non-manufacturing PMI

China’s official non-manufacturing PMI fell to 53.1 in May 2016 from April’s 53.5. The weakness in the service sector could hamper China’s transformation to a consumer-driven economy from an export- and manufacturing-driven economy.

The Chinese government recently announced that it would open up certain service sectors to foreign investment, including the finance, education, culture, and healthcare sectors.

The non-manufacturing PMI of the service industry was 52.0, a fall of 0.5% compared to the previous month. The non-manufacturing PMI of the construction industry was 59.4, the same as in the previous month. Production continued to sustain rapid growth.

The wholesale, retail trade, air transport, post, restaurants, telecommunications, broadcasting, television and satellite transmission services, Internet, and software and information technology services were active performers, and their total business increased quickly.

The indexes of transport via road, capital market services, and resident services and repair saw their total business fall.

Impact on funds

The non-manufacturing PMI data indicate that the service sector is also feeling the heat of a general slowdown. However, the service sector emerged as a major growth driver after China’s manufacturing sector became crippled due to overcapacity and sluggish demand.

China-focused funds such as the AllianzGI China Equity Fund Class A (ALQAX), the Eaton Vance Greater China Growth Fund Class A (EVCGX), the iShares MSCI China ETF (MCHI), and the SPDR S&P China ETF (GXC), which all have sizable exposures to service sector, benefit from growth in the non-manufacturing sector.

The above-mentioned 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’ll look at the Caixin China Composite PMI.

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