In October 2023, China’s service sector demonstrated notable expansion, marking the fastest growth rate in three months, as indicated by the latest private-sector survey. The Caixin/S&P Global services purchasing managers’ index (PMI) rose to 52.0, up from 50.3 in September. This figure surpasses the key threshold of 50 that denotes expansion versus contraction in economic activity. The results align with the official PMI released a week earlier, which indicated that non-manufacturing activities, including services and construction, had returned to growth territory. This uptick comes in the context of China’s economy, which experienced its slowest growth since early 2023 during the third quarter, particularly affecting the struggling property sector.
The Chinese government has been proactive in addressing the economic slowdown, particularly through monetary stimulus and support measures for the distressed property sector that were introduced in September. A subsequent gathering of senior Communist Party leaders emphasized the need for “necessary spending” to rejuvenate economic growth, underscoring the urgency of meeting growth targets for the year. The recent PMI survey reflects some success in these efforts, with new business levels showing a slight increase to 52.1, up from 51.0 in the previous month. However, it also reported a decline in the influx of new business from foreign markets, indicating a complex and partially uneven recovery.
While service providers have begun to increase hiring for the second consecutive month, reflecting confidence in improving business prospects, there remain challenges ahead. Capacity pressures are evident as the growth in new business continues to contribute to a backlog of work, which tightens operational capacities. Despite a slowdown in input price growth to a three-month low, companies are still feeling the strain of rising costs related to materials and energy. This indicates that while some service sectors are recovering, underlying economic pressures continue to challenge profitability and operational efficiency.
Optimism in the sector is rising, reaching the highest levels observed in five months, as firms have started enhancing promotional efforts to bolster sales growth for the upcoming year. Additionally, the Caixin/S&P Global Composite PMI, which includes manufacturing data, saw an increase to 51.9 from 50.3 in September, suggesting a modest uptick in overall economic activity. This combined index points towards a cautious recovery, although it exists against a backdrop of increasing deflationary pressures, weakened export growth, and declining loan demand—all factors that could complicate a full economic resurgence.
Economists, including Wang Zhe from Caixin Insight Group, caution that achieving China’s growth targets for 2024 will largely depend on a sustainable recovery in consumer demand. This underscores the necessity for policies aimed at enhancing household disposable income, which could stimulate spending and drive broader economic growth. The focus on consumer demand suggests that while there are positive signs in the services sector, the broader economic landscape remains fragile and could require further intervention and support from the government.
In summary, the latest service activity indicators highlight a blend of improvement and ongoing challenges within China’s economic environment. While the growth in services and initiatives from the government signify a potential recovery, persistent economic pressures suggest that sustained efforts will be necessary. Addressing consumer demand and ensuring financial stability in key sectors, particularly real estate, will be critical for a robust economic turnaround in the coming months.