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.
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.
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.
