China Services Growth Softens in Fresh Sign of Weakness

Expansion in China’s services industry slowed in June from the previous month, according to a private survey, providing more evidence that the key driver of the country’s post-Covid recovery is cooling.

(Bloomberg) — Expansion in China’s services industry slowed in June from the previous month, according to a private survey, providing more evidence that the key driver of the country’s post-Covid recovery is cooling.

The Caixin China services purchasing managers’ index declined to 53.9 from 57.1 in May, Caixin and S&P Global said in a statement Wednesday, the weakest since January and well below the median forecast of 56.2 among economists surveyed by Bloomberg. Any reading over 50 indicates an expansion from the prior month, while a number below that suggests contraction.

The drop indicates the stronger leg in China’s K-shaped economic recovery this year is losing momentum as consumers scale back spending on services such as travel and restaurants amid elevated youth unemployment and a gloomy income outlook. The data will likely spur more calls for the government to ramp up measures to support growth. 

“The pressure is mounting to stabilize employment,” said Bruce Pang, chief economist and head of research for Greater China at Jones Lang LaSalle Inc. “Measures already introduced have mainly focused on providing a floor to economic growth. But we need more comprehensive, larger-scale and stronger-than-expected policy support at a time when market demand and confidence have not yet had a clear recovery.”

Gauges for mainland China and Hong Kong stocks extended losses after the data was released, with the Hang Seng China Enterprises Index sliding as much as 1.9%. The offshore yuan erased morning gains to decline 0.2% at 7.2424 per dollar as of 1:16 p.m. local time.

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Domestic travel spending during the recent holiday for the dragon-boat festival was lower than pre-pandemic levels. Home sales figures are below the level in previous years, while estimates for June car sales showed a drop from a year ago.

The services recovery driven by increased mobility appears to have reached its peak, said Tommy Xie, head of greater China research at Overseas Chinese Banking Corp.

“The next task for China is transitioning from a recovery driven growth model to an expansionary growth model,” Xie said. “That will require policy support.”

Still, some economists cautioned that Beijing may not rush to take radical action. The government in March set a gross domestic product growth target of around 5% this year — a goal seen as conservative at the time. Economists polled by Bloomberg forecast an expansion of 5.5% for 2023. 

“It is still unclear to me if the government will launch aggressive policy stimulus at this stage,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management Ltd. “The government may continue to hold a ‘wait and see’ stance for now.”

Investors are watching closely for any signal of more stimulus when the Communist Party’s all-powerful Politburo is expected to meet later this month.

The Caixin survey focuses on smaller firms compared to the official services PMI. Results published last week for the government-led poll showed the services expansion moderating for a third straight month. The manufacturing industry is struggling to rebound from months of contraction, according to official data.

–With assistance from Ishika Mookerjee and Wenjin Lv.

(Updates with more analyst comments.)

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