China's Services Sector Sees Best Growth Since Mid-2021

A private survey of China’s services sector released on Wednesday showed the best growth for 15 months in July, suggesting a bounce in consumer confidence as Covid restrictions were eased.

The Caixin services purchasing managers’ index (PMI) rose to 55.5 in July, which was the highest level since April 2021 and beat the healthy result – 54.5 – from June.

However, the overall picture was mixed, as the survey showed foreign demand fell and companies cut staff for the seventh month in a row.

The 50-point mark separates growth from contraction on a monthly basis.

The reading contrasted with China‘s official services PMI on Sunday which showed growth moderated, but both gauges still pointed to solid expansion in the hard-hit sector while the country’s manufacturers struggled.

A sub-index for new business soared to nine-month high, thanks to improved domestic demand, but new export business contracted for the seventh successive month, the Caixin survey showed.

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Inflation Up, Firms Not Investing

Meanwhile, the rate of cost inflation in the services sector picked up for the first time since March as prices for food, fuel, raw materials and staff remained high.

And some market watchers are not sure how long the Covid reopening boost will last.

Fresh virus flare-ups have led to tightening curbs on activity in some cities in recent weeks, while the property market is in a deepening slump and global demand is faltering. Many businesses have put big spending plans on hold and are trying to cut costs.

“Beware the July rebound narrative. Markets are convinced that easing lockdowns mean the worst is over, but July data show that firms are still largely refusing to invest, borrow and especially now, hire,” Leland Miller, chief executive at data firm China Beige Book, said.

“This is likely because companies simply do not believe that their Covid Zero nightmare is over.”

Caixin’s July composite PMI, which includes both manufacturing and services activity, fell to 54.0 from 55.3 the month prior. The Caixin PMI is compiled by S&P Global from responses to questionnaires sent to purchasing managers inChina.

The country’s top leaders last week signalled their preparedness to miss the government growth target of around 5.5% for 2022. Analysts polled by Reuters have forecast growth to slow to 4.0% this year.