Caixin China General Services PMI (September 2020)

Service sector growth accelerates during September

Key findings

• Business activity and new orders both expand at quicker rates

• Employment rises for second month in a row

• Inflationary pressures weaken

Data were collected 11-21 September 2020

Chinese services companies signalled another steep increase in business activity at the end of the third quarter, to signal a further recovery from the coronavirus disease 2019 (COVID-19) pandemic. Growth was supported by a marked rise in total new business, though new export work continued to decline. Nonetheless, the sustained rise in overall client demand led firms to expand their payrolls for the second month in a row amid increased capacity pressures. Companies also retained a positive outlook regarding activity over the year ahead, with business confidence improving since August.

Prices data meanwhile indicated that inflationary pressures eased, with both input costs and output prices rising at softer rates at the end of the third quarter.

At 54.8 in September, the headline seasonally adjusted Business Activity Index was up from 54.0 in August and signalled a fifth successive monthly increase in service sector output. Notably, the rate of expansion was the sharpest for three months and among the quickest recorded over the past decade.

Supporting the further rise in overall business activity was a sustained increase in total new business. Moreover, the rate of new order growth accelerated since August and was solid overall. Panel members frequently mentioned that a further recovery of client demand following the pandemic and new project developments had boosted sales at the end of the third quarter. Underlying data indicated that stronger domestic demand was the principal factor leading to greater amounts of new work, as export orders contracted further.

The sustained increases in activity and new work led companies to expand their workforce numbers for the second month in a row during September. That said, the rate of job creation remained marginal overall.

Greater inflows of new orders also led to renewed pressure on operating capacities, as highlighted by a slight increase in the level of outstanding business. Backlogs of work have now risen in three of the past four months.

Service providers recorded a much softer rise in operating expenses during September. Notably, the rate of inflation dipped to a three-month low and was only marginal. Firms that reported higher costs generally attributed this to increased expenses related to transport, staff and raw materials.

Prices charged by services companies in China rose for the second month running in September, with some firms mentioning raising their selling prices in order to protect their margins. However, there were also reports that tough market competition had limited overall pricing power.

Business confidence regarding activity levels over the next 12 months remained strongly positive in September. Furthermore, the degree of positive sentiment was firmer than that recorded in August and broadly in line with the historical average. Companies that anticipate business activity to increase over the next year linked this to forecasts of a recovery in global economic conditions once the pandemic is over. Nonetheless, the potential resurgence of the COVID-19 virus around the world remained a key downside risk to the outlook.

Comment

Commenting on the China General Services PMI™ data, Dr. Wang Zhe, Senior Economist at Caixin Insight Group said:

"The Caixin China General Services Business Activity Index came in at 54.8 in September. The services sector's post-epidemic recovery showed signs of speeding up.

1) Domestic supply and demand in the services sector continued to recover at a faster pace, while overseas demand remained subdued. Both the business activity index and total new business expanded for the fifth straight month, and at a faster pace than the previous month, causing the gauge for outstanding business to break back into expansionary territory. Uncertainties about the pandemic overseas continued to drag down total demand, with the measure for new export business remaining in contractionary territory for seven of the last eight months.

2) Employment continued to expand for the second consecutive month. The employment gauge remained in expansionary territory for two months in a row after spending six months in contractionary territory. On one hand, companies gradually expanded hiring in the face of the market recovery. But on the other hand, the employment gauge came in just above 50, showing that the expansion was slight. Accordingly, hiring costs, coupling with rising raw material prices and transportation costs, led input costs to rise for the third consecutive month, though at a lesser rate. Meanwhile, prices that service providers charged customers expanded at a slower pace. During the economic recovery, market competition remained fierce, restricting companies' profitability.

3) Companies remained confident about the economic outlook. In September, the gauge for business expectations rose further into expansionary territory. Companies remained positive about the ongoing economic recovery and the effective control of the epidemic."

Caixin China General Composite PMI™

China's economy maintains strong growth momentum in September

Composite indices are weighted averages of comparable manufacturing and services indices. Weights reflect the relative size of the manufacturing and service sectors according to official GDP data. The China Composite Output Index is a weighted average of the Manufacturing Output Index and the Services Business Activity Index.

The Composite Output Index fell from 55.1 in August to 54.5 at the end of the third quarter but continued to signal a solid increase in total business activity across China. The latest upturn extends the current period of rising business activity to five months. Data broken down by sector indicated that a softer rise in manufacturing production more than offset a faster expansion of services activity.

Chinese firms recorded a stronger increase in total new work during September, which was supported by faster rates of growth across both the manufacturing and service sectors. Employment at the aggregate level meanwhile rose for the second month running. Though marginal, the rate of job creation was the fastest recorded for 10 months.

Overall, input costs rose only modestly in September, with the rate of inflation easing to a three-month low. Prices charged meanwhile rose only slightly.

Comment

Commenting on the China General Composite PMI™ data, Dr. Wang Zhe, Senior Economist at Caixin Insight Group said:

"The Caixin China Composite Output Index stood at 54.5 in September, remaining on an upward track. Supply and demand remained strong for the manufacturing and services sectors, with demand expanding at a faster pace. Employment continued to improve, as the employment index stayed in expansionary territory for the second straight month. The gauge for business expectations maintained a positive trend.

"Overall, the economy remained in a post-epidemic recovery phase and improved at a faster pace. Supply and demand both expanded in the manufacturing and services sectors. The gauges for orders, purchases and inventories all remained strong. Price measures remained stable. The reading for business expectations remained positive, reflecting strong confidence in the economic outlook for the year ahead. Employment in the manufacturing and services sectors improved simultaneously for the first time post-epidemic, but the improvements were not particularly strong, and one should not be overly optimistic about the employment situation. In the near term, there will still be uncertainties from Covid-19 overseas and the U.S. election, and the development of “dual circulation” in the domestic and international markets will continue to face challenges.”

Contact

Dr. Wang Zhe

Senior Economist

Caixin Insight Group

+86-10-8590-5019

zhewang@caixin.com

Ma Ling

Senior Director

Brand and Communications

Caixin Insight Group

T: +86-10-8590-5204

lingma@caixin.com

Annabel Fiddes

Associate Director

IHS Markit

T: +44 1491 461 010

annabel.fiddes@ihsmarkit.com

Bernard Aw

Principal Economist

IHS Markit

T: +65 6922 4226

bernard.aw@ihsmarkit.com

Katherine Smith

Public Relations

IHS Markit

T: +1-781-301-9311

katherine.smith@ihsmarkit.com

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