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China Caixin Manufacturing PMI Expands

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China’s manufacturing sector expanded in July

The China Caixin Manufacturing PMI (Purchasing Managers’ Index) rose to 50.6 in July from 48.6 in June. This indicates renewed improvement in operating conditions for the first time since February 2015. July survey data signaled a renewed upturn in operating conditions faced by Chinese manufacturers, with output, new orders, and buying activity all returning to growth.

The reading is above 50, which indicates that manufacturing activity is expanding. The Caixin Manufacturing PMI focuses more on small-to-medium-sized private companies that are adversely impacted by the economic slowdown and high financing costs.

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Commenting on the China General Manufacturing PMI data, Zhengsheng Zhong, director of macroeconomic analysis at CEBM Group, said, “The Chinese economy has begun to show signs of stabilizing due to the gradual implementation of proactive fiscal policy. But the pressure on economic growth remains, and supportive fiscal and monetary policies must be continued.”

Total new orders rise, but new export orders remain stagnated

July saw a modest rise in total new business, boosted by new products and improved marketing strategies. Data indicated that growth in new businesses was largely due to stronger domestic demand. However, export sales declined marginally at the start of the third quarter. With the rise in new orders, production rose modestly for the first time in four months.

Despite the upturn in new orders, goods producers continued to lower their staffing levels in July to reduce costs and raise productivity. Purchasing activity increased, and the level of work-in-progress and finished stock rose simultaneously.

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After a slight decline in June, average input costs increased across China’s manufacturing sector in July. The rate of inflation was the second-fastest since September 2013, after April 2016. According to respondents, higher prices for raw materials, particularly metals, led to increased cost burdens. As a result, companies raised their prices at a solid pace.

Impact on funds

The slump in China’s manufacturing sector is deep-rooted due to weak domestic and global demand. However, expansion in July indicates that the manufacturing sector could make a comeback if the Chinese government implements aggressive stimulus reforms to boost the staggering sector.

With the slowdown in factory output, 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 such as the Oberweis China Opportunities (OBCHX) and the Matthews China Investor Class (MCHFX) as well as ETFs such as the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) and the iShares MSCI China ETF (MCHI) provide exposure to Chinese stocks.

In the next part, we’ll analyze China’s official non-manufacturing PMI and the impact on mutual funds.

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