China Factories Still Expanding

Better news than expected from the world's biggest consumer of raw materials...

 

HSBC announced Tuesday that the preliminary purchasing managers' index (PMI) for China rose to 50.5, writes Frank Holmes on his blog at US Global Investors, a modest improvement from August's 50.2.

 

Analysts were expecting the index to decline to a neutral 50.0, based on softening factory employment, but this is a case when you're relieved others were off the mark.

 

Any number above 50.0 indicates expansion in the manufacturing sector; any number below, contraction. This is the fourth consecutive month that China's PMI has remained above that magic threshold, a sign that the country's manufacturing is stabilizing. The last time we saw a winning streak of this sort was between August and December of last year.

 

Every month, we eagerly anticipate the results of the HSBC China Manufacturing PMI because it partially informs the investment decisions we make in our China Region Fund (USCOX). Also, since China is the world's second-largest economy, its economic health greatly affects global markets and drives commodity demand.

 

 

GDP is helpful, as it measures a country's economic health, but it tells an incomplete story. Whereas GDP looks only at how things are, the PMI looks forward to how things might be—invaluable information for active money managers like us in the emerging market and resource spaces.

 

Although the PMI has remained above 50.0, the three-month moving average failed to cross above the one-month, as it did in May and held through July. We like to see this golden cross occur because it historically indicates more robust commodity demand from the world's second-largest economy.

 

 

China is responsible for about 40% of the world's copper consumption, and when analysts on Monday expressed skepticism of the country's industrial production, the metal's price fell to a three-month low of $3.05 per pound. Once everyone's jitters were abated with the release of the positive flash PMI results, however, the price of copper rose close to $3.10.

 

We won't know the final PMI results until September 30, but for now the 50.5 is encouraging. This news follows the central bank's announcement that it will inject $80 billion into the country's five largest banks to jumpstart the economy and help Premier Li Keqiang make good on his reassurance to global CEOs that China will achieve its targeted GDP growth rate of 7.5%.