China’s massive services sector, the largest of any in the country, saw activity levels accelerate in October with the latest Caixin-Markit services PMI jumping to 52.0.
The figure was an improvement on the 50.5 level of September and marked the fastest expansion seen since July.
“Service sector companies saw a further rise in total new business during October. In line with the trend for activity, the rate of new order growth picked up from September’s recent low and was solid overall. Panellists that reported greater volumes of new work generally linked this to improved underlying client demand,” noted Markit.
Reflective of the lift in new business, hiring accelerated to a three-month high, although in overall terms it remained subdued. Elsewhere the levels of unfinished work fell as did selling prices.
However, despite the acceleration in activity across the sector, sentiment among firms tanked, sliding to the lowest level in the decade-long history of the survey.
“Relatively soft market conditions and an uncertain economic outlook had reportedly dampened optimism towards the outlook for activity over the coming year,” said Markit.
Higher inputs costs, at the same time selling prices were reduced, may have also contributed to the dramatic decline in sentiment.
While firms remained downbeat, according to He Fan, chief economist at Caixin Insight Group, the latest batch of PMI reports from China points to an economy that is showing signs of stabilising, reducing the need for further stimulus.
“The Caixin China Services PMI is 52.0 for October, up significantly from 50.5 the previous month. The Caixin Composite Output Index reached 49.9, also much higher than 48.0 in September, close to the neutral 50-point level,” said Fan.
“This shows that previous stimulus policies have begun to take effect, while the economic structure steadily improved. The economy has started to show signs of stabilizing, reducing the need for a further stimulus. The government must be resolute and push forward the reform agenda in a well-rounded manner to release the long-term potential for sustainable economic growth.”
Although a welcome sign, the deterioration in sentiment is a concern, particularly as it’s not in isolation.
Based on the latest survey of banks, companies and households conducted by the People’s Bank of China at the end of the September quarter, sentiment towards the economy deteriorated sharply despite relative stability in business profits, orders and labour market conditions.
“The headline index on firms’ confidence in the state of the economy fell to its lowest since the trough in 2009. Firms’ sentiment about their own circumstances deteriorated too, with this index falling below 50 for the first time since 1999,” noted Chang Liu and Mark Williams, economists at Capital Economics.
Consumer sentiment levels have also deteriorated in line with those from business. According to the latest Westpac-MNI consumer sentiment index for October, confidence slid by 7.2% to 109.7 during the month, leaving the index at the lowest level seen since the survey first began in 2007.
Those outcomes certainly fit with the weak sentiment reading seen in the services PMI report today, and indicates that perceptions towards the economy are increasingly pessimistic. That doesn’t say much about current conditions within the economy at present, and is a concern should weak sentiment levels translate to activity levels in the months ahead.
In the midst of its epic economic transformation, China needs its services sector to be powering in order to offset weakness in industrial sectors.
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