China non-manufacturing PMI

Non-manufacturing activity in China slowed somewhat in December as measured by the country’s official non-manufacturing PMI (purchasing managers’ index). The indicator, published by the National Bureau of Statistics of China, fell to 54.5% in December compared with a reading of 54.7% in November. However, the pace remained the second quickest in 2016, with November having recorded the quickest pace of expansion.

A reading above 50% indicates an expansion in activity while one below signals contractions. The reading for December non-manufacturing PMI showed that though non-manufacturing – or services – activity in China continued to expand, its pace slowed just slightly from the previous month.

Unlike manufacturing PMI, which had contracted for a few months in 2016, services activity has continued to expand in China in the past 12 months as shown in the graph above.

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Services have been strong in the face of a sharp decline in exports, especially from the manufacturing sector.

Performance of sub-indices

The following ten sub-indices comprise the non-manufacturing PMI:

  • business activity index
  • new orders index
  • new export orders index
  • index of in-hand orders
  • inventory index
  • index of input prices
  • sales price index
  • employment index
  • supplier delivery time index
  • business activities expectation index

Among the aforementioned sub-indices, new orders, input prices, sales price, and inventory indices reported a rise in December. All other indices reported a decline. Readers should note that the index for supplier delivery times is inverted in order to ensure that it moves in a comparable dimension.

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The most substantial rise was seen in the input prices index, which rose 2.7 percentage points from November to 56.2%. This level was the index’s highest for 2016. Among industries, the rise in input prices was a sharp 4.7 percentage points to 63.5% for construction.

The new orders index, which shows demand for services, also rose. It was up by 0.3 percentage points to 52.1% in December. Among industries, new orders in construction far outpaced those in the services sector.

On the flip side, the employment index continued to decline in December, with the sub-index reading an even 50%. The decline was seen in both the construction and services industries.

Implication for China

The rise in non-manufacturing activity in China is crucial for the country at a time when then state of the global economy is making it difficult for exports to rise. Even after a pegged yuan to the dollar, exports continue to remain subdued.

A rise in services, coupled with domestic consumption, will help China broaden its economic horizon, leaving it less exposed to foreign demand. In the medium to long-term, this can be good news for investors in China-focused funds like the AllianzGI China Equity – Class A (ALQAX), the Eaton Vance Greater China Growth – Class A (EVCGX), the iShares MSCI China (MCHI), and the SPDR S&P China ETF (GXC) which have sizable exposure to the services sector.

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