In June, China’s services sector growth rate plunged to the lowest point in eight months according to the services purchasing managers’ index (PMI) by Caixin/S&P Global. The index fell from 54.0 in May to 51.2. The PMI has however managed to maintain expansion for 18 consecutive months despite this slump caused by a reduction in business activity due to COVID-19 disruptions.
Research indicates a continued five-month decline in the services sector, raising concerns about China’s ability to maintain steady growth. Policymakers may need to implement innovative strategies and targeted stimulation packages to counter this downward trend. With the services sector often reflecting the overall economy’s health, any decline could denote a broader slowdown, pressing the need for swift government intervention.
New order subindex saw a drop from 55.4 in May to 52.1 in June, while international demand also slightly lowered. Manufacturing output slowed down further resulting in the softening of labor market conditions. Supplier delivery time and potential supply chain issues increased as this sector index dipped below the 50-point threshold implying a contraction. However, business confidence remains moderately optimistic due to potential economic recovery expectations.
In the face of global economic concerns and augmented competition, business confidence witnessed a decline to its lowest since March 2020.
China’s service sector: navigating recent slowdown
This drop is attributable to a decrease in consumer spending, a surge in inflation rates, supply chain disruptions, labor shortage issues, and potential environmental regulations. Businesses are focusing on fortifying their balance sheets and strategic planning to tackle these challenges.
Service providers reduced hiring efforts in May following a workforce surge, while a slower inflation rate for input and output prices offered temporary relief. Yet, pressure on profits remained high due to the downturn in service activity and increased backlog of work. Despite these difficulties, firms sustained an optimistic outlook for the next twelve months, anticipating an economic recovery and upturn in client demands.
Despite the decrease in the composite PMI that tracks both the service and manufacturing sectors, markets anticipate an economic adjustment update at a mid-July leadership meeting. Contrarily, the National Bureau of Statistics reported an increase in the composite PMI. Moreover, the Independent China Beige Book warns of ‘peak growth’, suggesting the second quarter’s economic expansion may have been the fastest this year. The Chinese government aims to achieve a gradual slowdown to control risks from high leverage ratios in real estate. The upcoming leadership meeting is expected to present further strategies for the race to economic progress.
