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China's all-important services sector is slowing to a crawl

Getty

Growth across China’s services sector slowed to a crawl in December, fueling fears that economic growth within the country is faltering.

The latest Caixin-Markit services PMI gauge fell to 50.2 from 51.2 in November, the lowest level seen since July 2014.

Like all PMI gauges, a reading of 50 is deemed neutral, indicating that activity has neither accelerated nor decelerated during the month. A figure above 50 signals an expansion while anything below signals that activity levels have declined.

At 50.2, activity across the sector expanded – just. It was also the second lowest reading in the decade-long history of the survey.

On top of the concerning headline reading, Markit noted that firms expressed a relatively low level of optimism towards the 12-month business outlook in December with the reading sitting only marginally above the record low level hit just two months earlier.

He Fan, chief economist at Caixin Insight Group, suggests the poor reading intensifies the need to push ahead with supply side reforms.

The headline Caixin China General Services PMI for December is 50.2, down 1 point from the reading for the previous month and reaching the lowest point in 17 months.

In light of the setback to services sector growth, the government needs to gradually relax restrictions in the sector. This will release the potential of supply-side reform, improve the economic structure and help with the industrial transformation and upgrading.

In what will do little to alleviate concerns about the reliability of Chinese government data, the Caixin-Markit survey did exactly the opposite to the official services PMI gauge released by the National Bureau of Statistics on New Year’s Day.

The government’s PMI reading surged to 54.4, the highest level seen since August 2014, indicating that activity levels expanded strongly during the month.

While the NBS survey has a larger survey sample and includes both large, medium and small sized firms, not just the latter two as is the case with the Caixin-Markit survey, the divergence between the two is hard to explain given they both cover similar firms from the same sector over the same time period.

Another key difference, of course, is that one is conducted by the government and the other by a private sector firm.

Markets are likely to lean towards the latter, and the weak reading will do little to inspire confidence that China’s economic transition is gaining traction.

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