Caixin China General Services PMI (October 2020)

Business activity growth accelerates amid stronger client demand

Key findings

• Business activity expands at second-steepest rate since August 2010

• Total new order growth accelerates despite further dip in export sales

• Business confidence improves to highest level since April 2012

Data were collected 9-21 October 2020

Latest PMI data signalled a further acceleration in the rate of growth of business activity across China's service sector at the start of the fourth quarter. Furthermore, the rate of expansion was the second-quickest for over a decade, driven by a substantial increase in total new work. However, the resurgence of coronavirus disease 2019 (COVID-19) cases across a number of export markets led to a quicker decline in new work from overseas. The strong improvement in overall demand conditions nonetheless led to a further rise in staffing levels, while confidence towards the year ahead strengthened to the highest level since April 2012.

The headline seasonally adjusted Business Activity Index rose from 54.8 in September to 56.8 at the start of the fourth quarter, to signal a substantial increase in service sector output. Notably, the rate of growth was the second-fastest since August 2010 (after June 2020). Business activity has now risen in each of the past six months, to signal a sustained recovery from the COVID-19 related drops in activity seen earlier in the year.

In line with the trend for business activity, services companies reported a sharp and accelerated rise in new orders during October. Furthermore, the rate of increase was the third-steepest since September 2010, with panel members linking the upturn to a sustained recovery of client demand and new product launches. However, the amount of new work from overseas clients dipped for the fourth month in a row amid reports that a resurgence of the virus across a number of export markets had dampened foreign sales.

Increased amounts of new work and signs of firmer market conditions led companies to add to their payroll numbers for the third month in a row in October. Though modest, the rate of job creation was the strongest recorded for just over a year.

At the same time, outstanding workloads rose only slightly, with the rate of accumulation having softened since September. According to panellists, capacity pressures stemmed from a sustained and strong rise in new order inflows.

Service providers in China signalled a stronger rise in operating expenses at the start of the fourth quarter amid reports of higher staff and purchasing costs. Notably, the rate of inflation was the steepest for just over two years and solid.

However, efforts to remain competitive led firms to raise their output prices only slightly, with the rate of increased little-changed from that seen in September.

Finally, the latest survey revealed a marked improvement in business confidence regarding the 12-month outlook for output. The degree of optimism was, in fact, the strongest recorded since April 2012. Forecasts for growth were supported by expectations of further improvements in customer demand and that global economic conditions will strengthen once the pandemic is under control.

Comment

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

"The services sector's post-epidemic recovery continued to accelerate in October, with the Caixin China General Services Business Activity Index rising to 56.8 from 54.8 the previous month. Last month's reading was the second highest in 10 years, behind only the 58.4 recording in June this year.

1. Domestic supply and demand in the services sector continued to recover at a faster pace, while overseas demand was subdued. The business activity index and the total new business gauge both rose and stayed in expansionary territory for the sixth straight month in October. That led to outstanding business increasing slightly from the month before. The second wave of coronavirus infections in Europe and the third wave in the U.S. have significantly suppressed China's overseas demand. The gauge for new export orders remained in contractionary territory, falling from September's reading.

2. Employment in the services sector expanded for the third consecutive month as companies expanded their hiring in the face of strong domestic demand. The improvement in employment was significant, though the recovery was much slower than that of demand. The employment gauge hit its highest point since September 2019, which also drove up enterprises' labor costs. The gauge for input costs remained in positive territory and rose significantly, while the prices that service providers charged increased at a slower pace.

3. Enterprises were positive about the economic outlook, as the gauge for business expectations rose to the highest since April 2012. Companies were confident about China's effective control of the epidemic and the ongoing economic recovery in the coming year."

Caixin China General Composite PMI™

Composite output expands at joint-quickest rate since November 2010

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 rose from 54.5 in September to 55.7 at the start of the fourth quarter, signalling a sharp and accelerated rise in overall business activity across China. Notably, the rate of growth was the joint-quickest for nearly a decade, on a par with June 2020. Growth was supported by stronger increases in both manufacturing and services output.

Total new business received by Chinese firms also expanded at a quicker pace in October. Moreover, the latest upturn in overall sales was the fastest since November 2010, driven by substantial gains in both the manufacturing and service sectors. As a result, firms continued to add to their payrolls, though the aggregate rate of job creation was only modest.

Cost pressures picked up in October, with average input prices rising at the fastest rate for two years. However, composite output charges 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 came in at 55.7 in October, remaining on a strong uptrend as supply and demand were strong for the manufacturing and services sectors. The composite output index in October was the second highest in 10 years, and the composite new orders gauge also hit the highest point for a decade. Employment continued to recover, and the gauge for business expectations maintained a positive trend.

"Overall, as the domestic epidemic situation stabilizes, recovery remained the main economic theme. Supply and demand were both positive in the manufacturing and services sectors. The gauges for orders, purchases and inventories all remained strong, and enterprises were confident in the economic outlook for the year ahead. As market sentiment rebounded, employment in the manufacturing and services sectors also improved steadily. In October, the overseas epidemic put pressure on external demand for the two sectors. The development of the epidemic in Europe and the U.S. is still an uncertain factor affecting economic trends. In the coming months, a continued recovery of the Chinese economy is highly likely, but it is necessary to be cautious about the normalization of monetary and fiscal policies in the post-epidemic period.”

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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