What Does China's Declining Foreign Trade Signal?

(Continued from Prior Part)

China’s CPI data

In February, China’s CPI (consumer price index) rose 2.5% YoY (year-over-year)—largest rise since July 2014. It was also higher than the 1.8% YoY rise in January. The main reason for the rise in consumer inflation was higher food prices. Food prices soared as consumers shopped for Lunar New Year celebrations. Prices also rose due to unusually cold weather. The rise in consumer inflation in February could be due to seasonal factors.

According to the National Bureau of Statistics of China, food prices rose 7.3% in February. Pork prices rose by 25.4% YoY. The cost of vegetables rose by 30.6%. Meanwhile, non-food prices rose by 1.0%. YTD (year-to-date), overall consumer prices rose by 2.0% compared to the same period the previous year. On a month-over-month basis, the CPI rose 1.6% in February.

The inflation reading is below the government’s target inflation of 3%. There’s enough room for more stimulus measures from Chinese authorities to aid the slowing economy.

China’s PPI data

In February, the PPI (Producer Price Index) for manufactured goods fell at a slower pace to 4.9% YoY. Manufacturers resorted to price cutting due to weak demand. The decline was lower than the 5.3% YoY drop in the PPI in January. The PPI fell 0.3% month-over-month in January. It fell 0.5% in the previous month. YTD, the PPI fell 5.1% YoY.

The deflationary trend continued in the manufacturing sector. Lower prices mean lower profits for factories. With shrinking margins, it becomes difficult for manufacturers to run their businesses for a longer time. However, with the recent uptick in commodity prices such as oil and steel and expected stimulus from the Chinese monetary authority, the PPI should improve. The Chinese government already stepped up policy support to boost the property market and infrastructure construction.

Impact on mutual funds

PPI data point out overcapacity in factories and sluggish local demand in the manufacturing sector. As a result, the raw material cost is continuously going down. This has a negative impact on all of the companies operating in China. It impacts the performance of mutual funds such as the Clough China Fund – Class A (CHNAX), the Guinness Atkinson China and Hong Kong Fund (ICHKX), the Eaton Vance Greater China Growth Fund – Class A (EVCGX), and the John Hancock Greater China Opportunities Fund Class A (JCOAX).

Due to the Spring Festival, China saw a rise in the demand for travel and tourism. Consumer discretionary companies like Jumei International (JMEI), Qunar Cayman Islands (QUNR), Ctrip.com International (CTRP), and JD.com (JD) may have done good business during the long holiday celebration. This would have a positive impact on their revenue.