China’s July services activity expands at a faster pace – Caixin PMI.

China's July services activity expands at a faster pace - Caixin PMI.

China’s services sector expands, supported by summer travel season

Beijing

China’s services sector expanded at a slightly faster pace in July, according to a private-sector business survey. The growth was supported by a surge in business during the summer travel season, which partly offset the weakened manufacturing sector. The Caixin/S&P Global services purchasing managers’ index (PMI) rose to 54.1 in July, reflecting an expansion for the seventh consecutive month. This upbeat data contrasts with the official survey earlier this week, which showed a softening in services activity. Experts attribute this difference to the varying compositions of surveyed firms and methodologies used.

China’s economy experienced a solid rebound in the first quarter of this year after the removal of strict COVID-19 restrictions late last year. However, the recovery has been losing momentum recently due to weakening domestic and international demand. To support the flagging recovery, the authorities have implemented a series of policy measures, although the details have been scarce. Investors are eagerly expecting further policy actions to boost economic growth.

Wang Zhe, a senior economist at Caixin Insight Group, believes that the top priorities for these policies should focus on employment stability, managing expectations, and increasing household income. These measures aim to provide a solid foundation for economic recovery and ensure the well-being of individuals and families.

According to the private survey, companies reported improved operating conditions, an increase in customer numbers, and growth in sales at the beginning of the third quarter. These positive developments were attributed to the summer travel season and new product releases. However, the sub-index of new business, although showing slight improvement from June, still remained below the series average. This mixed picture was also reflected in retail sales, where some big-ticket items saw tepid demand.

“The number of customers since the beginning of summer has risen by 60-70% compared to the same period last year,” said a receptionist surnamed Wu at a Hangzhou-based homestay service provider. This indicates that summer travel has contributed to increased consumption, which has supported the services sector.

The encouraging sales figures have prompted companies to expand their workforce at the fastest pace since March. However, the level of positive sentiment among companies has decreased to an eight-month low, falling below the long-term trend. This suggests that although sales have improved, companies remain cautious about the economic outlook.

Sustained increases in expenses and improved demand have led to a further rise in prices charged by companies. However, some firms have mentioned that competitive market pressures have limited their pricing power. This highlights the delicate balance between increasing prices to cover rising costs and remaining competitive in the market.

The composite PMI, which combines both manufacturing and services activity, fell to 51.9 in July from 52.5 in June. This marks the seventh consecutive month of expansion, although the rate of growth was the slowest recorded since January. The disparity between the services and manufacturing sectors has been a prominent issue, according to ANBLE Wang.

Overall, China’s services sector has shown resilience and growth, thanks to the summer travel season. Despite the challenges faced by the manufacturing sector and the softening of the overall composite PMI, the services sector continues to expand, supported by policy measures and increased consumer demand during the summer months. Looking ahead, the Chinese government’s focus on employment stability, managing expectations, and increasing household income will play a crucial role in sustaining future economic growth.

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