Posted inIndustry views

The bet on China’s service sector

Divergence between China's services and manufacturing sectors continues, the latest data shows.

China’s official non-manufacturing purchasers manufacturing index (PMI) hit a four-month high, rising to 53.6 in November from 53.1 in October, data from the National Bureau of Statistics show.

At the same time, China’s official purchasing managers index which measures manufacturing, in November fell to 49.6, the lowest level in about three years. 

Luke Ng, senior vice president at FE Advisory, said this figure reflects the resilience of the service sector.

“The sub-index for China’s service industry and new orders in services also increased from October, signaling stronger demand from the service sector,” Ng added.

Some of the November data was likely nudged upward by Singles Day (November 11), when Alibaba Group racked up $14.3 bn in gross sales in one day, up 60% from Single’s Day 2014.

Riding the rebalance 

A survey of the top ten performing Chinese equity funds show that their top holdings are in the financials, consumer staples and consumer discretionary sectors.

BNP Paribas Investment Partners noted in a disclosure that it positioned its fund to benefit from the rebalancing of the Chinese economy.

‘We are overweight in the healthcare sector and we are positive about consumer staples,” the firm said.

Fullerton Fund Management said that while traditional manufacturing and upstream raw material industries are grappling with overcapacity, the consumer sector is expanding rapidly.

“Property sales continue to grow by 30%, owing to supportive monetary policy,” the firm said.

The top five performing Chinese equity funds with >50% exposure to the services sector over the past three years:



Chinese authorities continue to support the economic transition with measures such as a 50% tariff cut for the purchase of personal vehicles with less than 1.6 litres engines and a down payment reduction for first-time home buyers from 30% to 25%.

Ng said that China’s services sector will be the leading indicator of the country’s economic health as it continues to expand.

“Over the long run, the non-manufacturing PMI reading of China is likely to stay above that of the manufacturing PMI, as China continues to move from being a manufacturing-driven economy to one that is consumption-driven,” Ng said.

Se Yan, senior economist at Standard Chartered, forecasted that retail sales will accelerate due to the holiday season. He noted that fiscal and monetary stimulus generally feeds through to real activity with a lag of three to five months.

Part of the Mark Allen Group.