China's economy is slowing down after a rollicking start to the year

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China’s economy spluttered its way through June, losing some of the momentum it carried earlier in the year.

And, opposed to recent form, it was the nation’s services sector that drove the deceleration.

The Caixin-IHS Markit services Purchasing Managers Index (PMI) came in at 51.6 in June, falling back from the four-month high of 52.8 seen in May.

It was the second-lowest reading in the past 13 months.

Though above the 50 level that signals activity levels improved, the drop offsets a small improvement in the nation’s manufacturing sector, seeing the Caixin-IHS Markit composite PMI fall 0.4 points to 51.1, the lowest level in a year.

The composite PMI measures changes in activity levels across China’s manufacturing and 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 while activity levels across the economy improved, they did so at a far slower pace than what was seen earlier in the year.

The chart below from IHS Markit shows that deceleration perfectly.

Source: IHS Markit

Like the headline index, most of the survey’s components weakened from a month earlier.

“The new business sub-index fell to the weakest level since May 2016, while the sub-indices for input prices and prices charged both declined, but still remained in expansion territory,” said Zhengsheng Zhong, director of macroeconomic analysis at Caixin Insight Group.

“Even though the impact of slowing expansion in China’s services sector was cushioned by a slight rebound in manufacturing activity, the downward trend in the economy remains entrenched.”

Hardly a stellar assessment on the health of the Chinese economy, and one that differs substantially from the strength reported in the government’s official manufacturing and non-manufacturing PMI’s released last week.

According to China’s National Bureau of Statistics (NBS), the manufacturing Purchasing Manager’s Index (PMI) came in at 51.7 in June, topping expectations for a decline to 51.0.

It was the highest reading since March, improving on the 51.2 level reported in May.

The government’s separate non-manufacturing PMI rose to 54.9 over the same period, leaving it at the second-highest level since May 2014.

Clearly a very different result to that of the private-sector Caixin-IHS survey.

While that will only add fuel to the debate over the veracity of official Chinese economic data, it’s worthwhile remembering that the official survey’s are far more comprehensive in scale, including firms of all sizes rather than just small and medium-sized enterprises that the Caixin-IHS Markit survey tends to focus on.

That may, and we emphasise the word may, explain the divergent performance between the two communicated in May.

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