Chinese companies are shedding staff as margin pressures intensify

Natalie Behring-Chisholm/Getty Images
  • Activity across China’s giant services sector improved modestly in September, helping to offset renewed weakness in manufacturing.
  • Despite the modest improvement in overall activity levels, firms shed staff, reporting a reduction in order backlogs and intense margin pressures.
  • Activity in China’s manufacturing sector was unchanged in September, the weakest result in nearly a year.

Activity across China’s giant services sector improved modestly in September, helping to offset renewed weakness in manufacturing.

However, from a longer-term and broader perspective, China’s economy has clearly lost some momentum in recent months.

The IHS-Markit China Services Purchasing Managers Index (PMI), produced in conjunction with the Caixin Insight Group, rose to 53.1 in September in seasonally adjusted terms, leaving it at the highest level in three months.

This PMI measures perceived changes in activity levels across China’s services sector from one month to the next.

Anything above 50 signals that activity levels are improving while a reading below suggests they’re deteriorating. The distance away from 50 indicates how quickly activity levels are expanding or contracting.

So based on responses received last month, activity levels improved at a faster pace than in August.

IHS Markit

IHS Markit said new orders increased by the most since June, helped by “new product offerings and increased client bases”.

However, despite the pick-up in new work — seen as a lead indicator for activity levels in the future — firms reported a reduction in order backlogs, continuing the pattern seen in four of the prior five months.

It also indicated that they reduced staffing levels for the first time in more than two years.

“Companies indicated that company restructuring plans and the non-replacement of voluntary leavers had contributed to lower employment,” the group said.

Adding to concern, firms also reported that input costs surged over the month, increasing at the second-fastest rate since May 2012. Over the same period, final costs for customers were near-unchanged, indicating intensified margin pressures at services providers.

“Higher prices for fuel, raw materials and greater staffing costs all underpinned the latest increase in operating expenses,” IHS Markit said.

“Despite the faster increase in input costs, services companies signalled broadly no change to their output charges, with some firms mentioning greater efforts to remain competitive.”

So despite the lift in the headline services PMI and new orders, the news was not universally positive in the latest report.

In particular, Zhengsheng Zhong, Director of Macroeconomic Analysis at Caixin Insight Group, said the sudden drop in staffing levels, as well as divergent trends in prices, warrants close attention.

“[We should be wary that] overall employment contracted in September, with the sub-index hitting its lowest level since August 2016. The deterioration in employment will test policymakers’ determination in pressing ahead with reforms,” he said.

“Prices charged by service providers declined for the first time in 13 months, while input costs rose at their quickest pace since January, which could squeeze company profit margins.”

Despite the pick-up in activity in the services sector last month, that was only enough to offset a deterioration in the separate manufacturing PMI released by IHS Markit which fell to the lowest level since October 2017.

Combined, that left the Composite PMI at 52.1, up marginally from 52.0 in August.

Although indicative of a slightly faster pace of expansion, the composite index remains below the levels seen earlier in the year.

“[This signals] the rate of activity growth remained lacklustre compared to that seen earlier in 2018,” IHS Markit said.

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