It is of no surprise that financial markets are dependent on China’s data. The second largest economy over the years was considered as the new emerging striking force in terms of manufacturing, in addition lately to the service sector which over the years has continued to develop. Yesterday, Caixin issued its ‘purchasing manager index (PMI) for the month of April, in which some sort of softness was noted, despite still at expansionary levels.
April’s Caixin services PMI pointed towards the moderate levels of 51.8 from March's 52.2. The Caixin China General Services PMI is based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 400 private service sector companies. The index tracks variables such as sales, employment, inventories and prices. Just for the benefit of the doubt, a reading above 50 indicates activity is growing, while one below that level suggests a contraction. Figures for the month of April were broadly in line with the official services PMI, released in the weekend, which came in at 53.5 for April, down from 53.8 in March.
Predominately, the manufacturing PMI is usually more the investors’ radar due to the fact that historically China was seen as an evolving economy in terms of construction, primarily in major cities due to the urbanization from lower tier cities within the country. That said, nowadays the service sector, which includes consumer industries such as real estate, retail and leisure, has become the majority of the mainland economy. It is now considered as a good barometer of consumption, as it accounts for more than 50 percent of gross domestic product.
The main factor for the increase in the service segment as a percentage of GDP is primarily brought about by the recent wave of monetary stimulus, predominately following the series of cuts within the reserve ratio requirement and interest rate cuts.
Furthermore, the Caixin China Composite PMI, which includes both manufacturing and services, expanded for a second month, but slowed to 50.8 from March's 51.3.
Over the weekend, a set of new fresh economic data from the current account will give a clearer picture of whether the second largest economy is experiencing any further weakening. Analysts are forecasting a decline of 4 per cent for imports with the prior figure standing at – 7.6 per cent, while from the exports front analysts are estimating an improvement from the prior figure of -11.5 per cent to -0.5 per cent.
Furthermore, other important data are those from the foreign exchange reserve front, in which following the rise in reserves in the month of March, for the first time in five months, analysts are predicting a slight decline of circa 0.27 per cent. Over the past months, the stronger renminbi has helped ease the decline in China’s reserves, thus lessening the need for the Central Bank to sell foreign cash to support the domestic currency’s value. The latest gains within the renminbi decreased the chances of a capital flight from the country.
In my view, despite over the past days we did see an improvement in Chinese data, downward pressures on the economy are high and possibly catalysts going forward are subdued. That said investors might feel some sort of comfort, when considering the fact that China still has room of further easing if need be, as opposed to the euro-zone.
Disclaimer: This article was issued by Jordan Portelli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.