China: Manufacturing vs. Services

September 24, 2015 | David Hernandez, CFA, Director of Traditional Manager Search

This week’s chart examines Markit’s Purchase Manager Index (PMI) for the manufacturing and services sectors in China. PMI serves as an indicator of economic health. A reading above 50 represents expansion while a reading below 50 indicates contraction. The manufacturing sector (blue line) continues to weaken with the September flash coming in at 47. Meanwhile, the services sector (red line), an increasingly important part of the economy, remains in expansion territory.

Given the economy’s current size and transition from export-driven to domestic consumption-focused, a slowdown in overall growth should be expected, with more growth ultimately coming from consumption (represented by the service sector) than export-related activity (measured by manufacturing). Analysts have often cited 5–6% as a reasonable range for medium-term growth, a far cry from a crash landing. The IMF recently cited China’s progress in domestic rebalancing, with consumption contributing slightly more growth than gross fixed capital.¹ Therefore, the traditional data points focused on manufacturing and infrastructure do not provide a complete picture of the current Chinese economy. Instead, the growth in services PMI reflects how the Chinese economy is becoming more dependent on domestic consumption than exports to other countries.