New PMI figures show manufacturing is riding high in China after the lifting of Covid restrictions. This may be short-lived, however, as US companies like Apple decouple from local supply chains and the domestic market turns from goods to services.
- Chinese manufacturing at highest level for 10 years despite US companies exiting.
- Spending to shift to services and away from industrial activity, says Jens Nordvig.
- The iShares MSCI China ETF is down 8.2% over the past month.
Chinese manufacturing is growing at its fastest level in more than a decade, new figures show, as the country recovers from the effects of pandemic restrictions.
The manufacturing sector’s Purchasing Managers’ Index (PMI) showed a reading of 52.6 for the month of February, up from 50.1 in January to its highest level since April 2012.
The Caixin China General Manufacturing PMI also logged its first growth for over six months in February, reaching 51.6, above a market consensus of 50.2.
The news comes at a time when US companies are reassessing their relationship with China, which could impact future figures. As Jens Nordvig, founder and CEO of Exante Data and MarketReader, recently told the Opto Sessions podcast, China has “very significant geopolitical tension with the United States, and lots of companies are getting much more cautious in terms of having their supply chains concentrated around China.”
Flight from China
Nordvig predicts a “big bounce over the next two to three months” in China. He pins this to rising consumer activity post-pandemic, with a skew towards spending on services rather than industrial activity.
“China experienced an incredible export boom over the last couple of years because a lot of people around the world were more focused on consuming goods at home, as opposed to spending their income on services,” he says.
But that trend is reversing. “Goods consumption globally, as a share of income, is going down. And that's going to hurt China.”
At the National People’s Congress on 5 March, China’s government provided a target of around 5% growth in GDP for this year, the lowest figure in over 30 years.
Meanwhile, companies from across the globe are exiting China. For example, Sony [SONY] has moved 90% of its camera production to Thailand, and Samsung [005930.KS] cut 70% of its workforce in China last year.
Apple [AAPL] supplier GoerTek [002241.SZ] is currently spending $280m on facilities in Vietnam to make Apple’s AirPods. Apple also intends to make a quarter of its iPhones in India, and computer giant Dell reportedly plans to stop using Chinese-produced chips by 2024.
The decoupling of Western companies from Chinese supply chains is making headlines, but the country still contributes to approximately 15% of global exports, and many firms remain inextricably tied to China.
German carmaker Volkswagen [VOW3.DE] recently underlined its commitment to its Xinjiang plant, run in a joint venture with state-backed SAIC Motor [600104.SS], despite reports of human rights abuses in the region. “Our partner… is committed to ensuring a positive atmosphere and proper working conditions,” said Ralf Brandstätter, CEO of VW in China, during a recent tour.
Apple’s attempts to decouple from China, meanwhile, have faced challenges. In February, a fire at Taiwanese supplier Foxlink's plant in southern India halted production of iPhone cables. Reports of unsatisfactory fire safety measures followed, and the plant is likely to remain closed for two months.
The US is reducing its reliance on China, but it’s still the source of around 18% of the country’s imported goods, according to the Peterson Institute for International Economics. Demand for ‘made in China’ items including consumer technology and furniture may have reduced, but others like lithium-ion batteries are rising. An EU Chamber of Commerce survey last year suggested 94% of companies currently invested in South China intended to stay.
Funds in focus: iShares MSCI China ETF
For investors seeking exposure to Apple stock, the company is the top holding in the Technology Select Sector SPDR Fund [XLK], with a weighting of 22.99% as of 7 March.
The ETF is up by 12.7% year-to-date, but down 0.6% over the past month.
Samsung is the second-largest holding in the KraneShares Electric Vehicles & Future Mobility Index ETF [KARS], with a weighting of 4.23% as of 8 March. The fund also holds Volkswagen at a weighting of 1.13%. KARS is up 8.1% year-to-date, but down 8.2% over the past month.
Those seeking exposure to large- and mid-sized companies in China could look at the
iShares MSCI China ETF [MCHI]. As of 8 March, its top three holdings are Tencent [0700.HK], Alibaba [9988.HK] and Meituan [3690.HK].
The fund is up by 1.9% year-to-date, but down 8.2% over the past month.