Downturn continues in China’s manufacturing sector
The Caixin China Manufacturing PMI (purchasing managers’ index) contracted further in May 2016, coming in at 49.2 compared to 49.4 in April. This was below the neutral 50.0 level for the 15th consecutive month.
The data indicate that the operating conditions in China’s manufacturing sector deteriorated at the fastest rate in three months in May, reflecting a renewed fall in new orders, falling output, destocking, and ongoing job losses. Companies witnessed renewed falls in output and total new orders in May.
The reading is below the 50 mark, which indicates that manufacturing activity is contracting. The Caixin Manufacturing PMI focuses more on small- to medium-sized private companies, which have been adversely impacted by the economic slowdown and high financing costs.
Commenting on the China general manufacturing PMI data, Dr. Zhengsheng Zhong, director of macroeconomic analysis at CEBM Group, said, “Overall, China’s economy has not been able to sustain the recovery it had in the first quarter and is in the process of bottoming out. The government still needs to make full use of proactive fiscal policy measures accompanied by a prudent monetary policy to prevent the economy from slowing further.”
Total new orders fell
Orderbooks were hit by an increased rate of decline in new export orders in May. Producers of investment goods such as machinery reported the steepest falls in export sales as well as falls in total new orders, pointing to weak domestic and global investment demand. In contrast, manufacturers of consumer goods reported improvements in new orders and exports.
Job-shedding persisted in the manufacturing sector, with the rate of reduction remaining similar to February 2016’s multiyear record. At the same time, the backlog of work rose only slightly in May. So far in 2016, the highest incidence of job cutting has been seen in the energy and extraction, transport, and chemicals and plastics sectors. The food and drink sector has seen the lowest rate of job cutting.
Reflective of weak demand conditions, companies trimmed their production schedules and purchasing activities slightly in May. Meanwhile, average input costs rose for a third consecutive month in May due to rise in global commodity prices, notably oil.
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 get the staggering economy’s growth back on track.
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 taking hits in the coming months.
Investors can take exposure to Chinese stocks through mutual funds and ETFs. Mutual funds such as the Oberweis China Opportunities Fund (OBCHX), the Matthews China Fund Investor Class (MCHFX), and 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 article, we’ll analyze China’s official non-manufacturing PMI and its impact on these funds.
The Caixin China General Services Business Activity Index indicated that service activity expanded at a slower pace in May 2016, coming in at 51.2.
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