China's services sector gauge plunges to record low

Activity in China’s services sector crashed in February, resulting in its worst month on record, as the coronavirus outbreak saw business grind to a halt.

Adjusted for seasonal factors, the Caixin Markit Services PMI index, tumbled to just 26.5 from 51.8 in January, the first time it has fallen before the neutral 50.0 reading since the survey began nearly 15 years before.

New orders fell at their steepest rate since 2008 and the decline in employment was the most severe since late 2005.

Sales were wiped out as millions of people were forced to stay at home, travel restrictions were put in place and companies closed as China sought to contain the coronavirus outbreak with the Chinese Lunar New Year also exerting a drag.

Services weighed heavily on the Caixin Markit Composite PMI, which printed at 27.5 in February compared to 51.9 a month earlier. The Caixin Markit Manufacturing PMI meanwhile came in below forecasts at 40.3 for February, compared to 51.1 in January.

Zhengsheng Zhong, chairman and chief economist at CEBM Group, said: “Business confidence fell to a record low. Although polices have been introduced to provide tax and financing support for industries and small businesses heavily impacted by the epidemic, service companies were still concerned about uncertainties resulting from the epidemic.

“The coronavirus epidemic has obviously impacted China’s economy. It is necessary to pay attention to the divergence of business sentiment between the manufacturing and service sectors…it is more difficult for service companies to make up their cashflow losses.”

Michael Hewson, chief market analyst at CMC Markets, said: “This low reading merely serves to reinforce how badly affected the services sector in China has been hit by the impact of the coronavirus, even more so than the manufacturing sector.”

Freya Beamish, chief Asia economist at Pantheon Macroeconomics, said: “The one positive was that backlogs of work rose, thanks to restricted capacity, suggesting that once capacity problems are sorted, then output should rebound quickly.

“The report, however, painted a grimmer picture of course of new demand, with record declines in total new work and export sales. Those should rebound once the virus threat recedes, but the services sector will be left with a cashflow hole that is much harder to recoup than in the manufacturing sector.

“All the PMIs were unanimous that the employment situation is grim, underlining that the government will need to do more to support households.”