China's services sector spluttered its way through July

Photo by Kevin Frayer/Getty Images

China’s services sector, now the largest part of the Chinese economy, spluttered its way through July.

The latest Caixin-IHS Markit services Purchasing Managers Index (PMI) fell fractionally to 51.5 from 51.6 in June, leaving it at the equal lowest level since May 2016.

It was also well below the Chinese government’s official non-manufacturing PMI released last week that came in significantly stronger at 54.5.

PMI’s measure changes in activity levels across a particular 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 that means that while activity levels improved once again across China’s services sector in July, they did so at the slowest pace in over a year.

Quite the contrast to the ongoing strength reported in the official government report.

Source: IHS Markit

“New business also expanded at a weaker pace across the service sector in July,” IHS Markit said.

“Furthermore, the rate of growth edged down to the least marked for 16 months, with some panellists linking relatively subdued sales to lower client numbers.”

Reflecting that view, the group said that confidence towards the one-year business outlook fell to the weakest level since November last year.

However, despite that moderation, services firms continued to add to staffing levels, continuing the trend seen in the prior ten months, while order backlogs also increased, albeit fractionally.

Despite the moderation in China’s services sector during July, that was more than offset by an improvement in the nation’s manufacturing sector over the same period, leaving the Caixin-IHS Markit composite PMI at 51.9, the highest level in four months.

The composite index combines the PMI readings for both China’s services and manufacturing to provide a measure on the performance of the broader Chinese economy in any given month.

“China’s economic performance in July was stronger than expected, mainly due to sustained recovery in the manufacturing sector,” said Zhengsheng Zhong, director of macroeconomic analysis at Caixin Insight Group.

“However, downward pressure on the economy likely remains as the index gauging companies’ confidence towards the 12-month business outlook dropped in both the manufacturing and services industries.”

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