Assessing the Caixin China Manufacturing PMI in October
China's Manufacturing Activity and Mutual Funds in October 2015
Deteriorating operating conditions?
The Caixin China Manufacturing PMI (purchasing managers’ index) came in at a 48.3 in October 2015 after adjustments for seasonal factors, up from 47.2 in September. However, the October reading is below the 50 mark. A reading below 50 indicates that manufacturing activity is shrinking, whereas a reading above 50 indicates expansion.
Production in China according to this index fell by the slowest rate in four months. Overall new business declined, however, at a slower pace mainly due to weak domestic demand. Still, new business was supported by a marginal increase in export orders for the first time since June 2015.
Overall declines in new orders
A modest decline in new orders led manufacturing firms to slow down their production schedules. Job shedding continued as factories adopted downsizing policies as well as the non-replacement of workers leaving voluntarily.
Inventories likewise fell in October as manufacturers cut back on their purchasing activities, and sales went down as a result, leaving finished goods inventories to pile up.
Input and output costs
Average costs in China declined in October 2015, but deflation persisted despite the government’s easing monetary policies. Input costs were lower for a broad range of raw materials—metals, in particular—due to the deflationary environment. In order to boost demand, sellers in China gave heavy discounts to consumers. As a result, output costs also declined as manufacturers passed their savings on to clients due to increased competition among them for new work orders.
Easing policies
China loosened its monetary and fiscal policy in late October after its 3Q15 GDP (gross domestic product) growth rate came in at 6.9%, below the 7.0% in 2Q15. China is aiming at a growth target of 7% for 2015. The growth rate in the world’s second-largest economy already declined from 10.4% in 2010 to 7.7% in 2012.
Impact on China-focused mutual funds
The AllianzGI China Equity Fund Class A (ALQAX) has the largest exposure to the industrials sector at ~20%. Three other funds—the US Global Investors China Region Fund Investor Class (USCOX), the Shelton Greater China Fund (SGCFX), and the Guinness Atkinson China and Hong Kong Fund (ICHKX)—have more than 10% exposure to the industrials sector.
With the decline in factory output, companies such as Taiwan Semiconductor Manufacturing (TSM), China Mobile, CNOOC (CEO), and Tencent Holdings (TCEHY) are facing pressure to sustain their margins. Since the aforementioned mutual funds are invested in these companies, they would be adversely impacted.
In the next and final part of this series, we’ll analyze the Caixin China General Services Business Activity Index and the Caixin China Composite PMI as well as their impacts on the China-based mutual funds we’ve been highlighting.
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