Understanding the PMI
China’s manufacturing purchasing managers’ index (or PMI) is an economic indicator that gives you a snapshot of the manufacturing sector. A reading above 50 indicates that activity is expanding while below 50 signals a contraction.
The manufacturing PMI is based on five sub-indices—the production index, new orders index, employed person index, main raw materials inventory index, and supplier delivery time index.
Official manufacturing PMI drops in June
China’s official Manufacturing PMI weakened slightly in June. It came in at 50.0, lower than the 50.1 recorded in May. This index is released every month by the National Bureau of Statistics, and it mainly focuses on large Chinese companies. The data indicates that China’s manufacturing sector is still struggling to gain traction. Analysts expect Chinese authorities to extend monetary support, given the tepid growth in the second quarter. The NBS stated that the Brexit vote, expectations of a US interest rate hike, and weaker economic growth globally have impacted exporters.
NBS statistician Zhao Qinghe said, “in general, the manufacturing sector is steady, and its structures are improved. High-tech manufacturing picked up remarkably while industries with excess capacity contracted.”
Impact on funds
China’s manufacturing sector is affected by overcapacity and the global slowdown. So a weakening PMI may impact the performance of China-focused funds such as the Oberweis China Opportunities Fund (OBCHX), the Matthews China Fund – Investor Class (MCHFX), the iShares MSCI China ETF (MCHI), and the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR), which have considerable exposure to the industrials sector. Also, it shows that the slowdown in the manufacturing sector is deep-rooted and requires more stimulus from the government to bounce back.
The above mutual funds invest in stocks such as Tencent Holdings (TCEHY), JD.com (JD), Vipshop Holdings (VIPS), and NetEase (NTES). These companies’ performance has reacted negatively to sluggish global demand.
In the next part of this series, we’ll look at the Caixin China manufacturing PMI.