Caixin China Manufacturing PMI Stabilizes in November
China’s Manufacturing PMI's Impact on China-focused Mutual Funds
Manufacturing output stabilized in November
The Caixin China Manufacturing PMI (purchasing managers’ index) came in at 48.6 in November, slightly up from 48.3 in October, as manufacturing units signaled that output stabilized in November. However, the reading is still below 50. A reading under 50 indicates that manufacturing activity is contracting while one above 50 indicates expansion. The Caixin Manufacturing PMI focuses more on small to medium-sized private firms, that are adversely impacted by the economic slowdown and high financing costs.
Overall, new business declined, although at a slower pace. This was mainly due to weak domestic demand. However, new business was supported by a marginal rise in new export orders.
Overall new orders decline
New export orders rose in November due to improved foreign client demand. But weaker domestic demand created a drag on the overall business. The lower workload resulted in reduced purchasing activity and lower labor force requirements. Backlogs of work rose at manufacturing companies, albeit at a moderate pace. The level of inventories fell in November, and for the first time since July 2015, the level of finished goods also fell.
Input and output cost
The average cost fell in November amid lower input cost. This was for a broad range of raw materials, and metals in particular, due to a deflationary environment. To boost demand, sellers gave heavy discounts to consumers. As a result, the output cost also fell as manufacturers passed their savings to clients due to increased competition between them for new work orders.
Impact on mutual funds
The AllianzGI China Equity Fund – Class A (ALQAX) has the largest exposure of ~20% to the industrials sector among the four mutual funds depicted in the graph above. The three other funds, namely 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 each to the industrials sector.
With the fall in factory output, companies such as Taiwan Semiconductor Manufacturing (TSM), China Mobile (CHL), CNOOC (CEO), and Tencent Holdings (TCEHY) are facing pressure to sustain their margins. Since the mutual funds mentioned above are invested in these companies, they would be adversely impacted.
In the next article, we’ll analyze China’s Services and Composite PMIs and their impact on mutual funds.
Browse this series on Market Realist:
