China services sector shrinks in September - Caixin

Services activity in China shrank in September for the first time in four months, as Covid restrictions took their tool, according to data released over the weekend.

The Caixin services purchasing managers’ index fell to 49.3 from 55.0 in August, coming in well below consensus expectations of 54.4. A reading below 50.0 signals contraction, while a reading above indicates expansion.

Wang Zhe, senior economist at Caixin Insight, said: "The current pandemic situation is still severe and complex, and the negative impact of Covid controls on the economy is still pronounced.

"Policy implementation should focus on promoting employment, granting subsidies, as well as boosting demand and market confidence by sending policy signals.”

Craig Botham, chief China+ economist at Pantheon Macroeconomics, said: "Efforts to flatten the Covid curve ahead of the October Congress took their toll on service sector activity in September. Business activity fell to its lowest level since May, and the sharpest decline since March, the start of the Omicron outbreak. New orders and future activity also saw large drops, with new orders below 50 again for the first time since May and backlogs of work also fell slightly; taken together this suggests a further drop for activity in October."

Botham noted that the output price index rose to 51.0 in September from 50.2 a month earlier, hitting its highest level since April and suggesting a pick-up in services inflation despite the weakness of demand, with raw material and labour costs reportedly being passed on to consumers.

"Input cost inflation, however, moderated slightly, and we don’t expect a sustained or material increase in core inflation as long as zero-Covid restrictions are in place. The earliest relaxation - but not abandonment of the policy - will not arrive until November," he said.