China Service Sector Growth Weakest In 8 Months

China’s service sector grew at the slowest pace in eight months in August largely due to weaker new business, signaling a slowdown in economic growth in the third quarter.

The Caixin services Purchasing Managers’ Index slipped more-than-expected to 51.8 in August from 54.1 in July. The expected score was 53.6.

A reading above 50.0 indicates expansion in the sector. However, the latest upturn was the slowest in the current sequence of expansion.

New orders growth moderated in August partly due to weaker foreign demand. New export business fell for the first time since December 2022.

Despite the slowdown, companies continued to raise staffing level. Firms cited plans to expand capacity and higher business requirements as reasons for more hiring.

Business confidence remained positive in August and companies linked growth forecasts to projections of stronger global economic conditions and improved customer numbers. However, overall optimism reached a nine-month low.

Outstanding business accumulated despite the sustained rise in headcounts. Backlogs of work increased due to greater amount of new orders and subsequent pressure on capacity.

On the price front, the survey showed that input costs increased at the softest pace in six months. Higher operating expenses were generally linked to increased raw material, staff and fuel costs.

At the same time, output charges increased only slightly in August. The rate of inflation was the weakest seen since April.

The composite output index edged down to 51.7 in August from 51.9 in the previous month. The private sector has expanded for the eight consecutive months. That said, the score pointed to only a moderate growth and also marked the weakest since January.

The seasonal impacts on economic activity will gradually subside but the problems of insufficient domestic demand and weak expectations may form a vicious cycle for a protracted period of time.

“Combined with the uncertainty in external demand, the downward pressure on the economy may continue to increase,” Wang Zhe, a senior economist at Caixin Insight Group said. Stabilizing expectations and increasing household income should remain the policy focus, Wang noted.

“The internal and external economic environments are becoming increasingly complex, adding to the urgency and necessity of implementing relevant supportive policies,” Wang added.

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