China's services sector PMI falls to seven-month low

Business activity in China edged ahead in September, a survey showed on Tuesday, despite activity in the services sector softening to a seven-month low.

The Caixin China Composite Output Index rose to 51.9 in September from 51.6 in August, the strongest rate of growth since April. The growth was underpinned by the manufacturing sector, after the seasonally-adjusted Chinese Services Business Activity Index fell to 51.3 from 52.1 a month earlier. That was the softest rise in activity for seven months and below consensus for 52.0.

Services account for around half the Chinese economy.

Composite new orders expanded at the steepest rate since February 2018, with both manufacturers and service providers recording stronger rates of growth. Services companies saw the quickest rise in new orders since January 2018.

However, the survey also found a "solid and accelerated" increase in average operating expenses during September for those operating in the services sector.

Zhengsheng Zhong, director of macroeconomic analysis at CEBM Group, said: "China’s economy showed signs of marginal recovery in September, as the labour market improved and domestic demand increased at a faster pace.

"However, fluctuations in exchange rates and rising costs of labour and raw materials increase pressure on companies, which restrained business confidence. Due to previous destocking and capacity-reduction activities, constraints on companies’ production capacity became more severe and backlogs of work increased noticeably, which will help companies restore their investment.

"After a fast slowdown in previous quarters, China’s economy growth began to show signs of stability."

Freya Beamish, chief Asia economist at Pantheon Macroeconomics, said: "[The] consensus [for 52.0] look optimistic; services are in the process of catching a cold from manufacturing. That said, new orders rose at the quickest pace since January last year, with panellists reporting new product releases and firm client demand.

"The series is noisy, however, and we’d need more data to believe in a recovery, especially with the report also pointing to further deterioration in sentiment."

China’s economy has slowed recently, hurt in part by the Beijing-Washington trade war and its impact on the country’s manufacturing sector.