China's economy is 'still weak and unstable'

Reuters/Damir Sagolj

Activity levels in China’s services sector, tasked with powering China’s economic transition in the years ahead, decelerated sharply in February, yet again amplifying concerns over the strength of the Chinese economy at present.

The Caixin-Markit services purchasing managers’ index slid to 51.2 in February, down 1.2 points on the 52.4 level in January.

The index is now fractionally above the 50 level that separates expansion from contraction, meaning that while activity levels continued to expand in February, the pace was all but glacial.

Like the headline index, the internals of the report were hardly inspiring.

“Latest data indicated a softening of growth momentum across China’s service sector...pointing to a rate of growth that is much slower than the historical series average,” said Markit.

It continued:

New business growth also slowed across the service sector in February after a solid rise at the start of the year. Furthermore, the latest increase in new orders was weaker than the long-run trend and only modest, with some panellists commenting on relatively subdued client demand.

Reuters/Damir Sagolj

With growth in new orders slowing, so, too, did the pace of hiring in the sector.

“Companies that reported higher staff numbers generally mentioned hiring new employees in line with new order growth,” said Markit.

Mirroring the slowdown in orders, backlogs of work also declined.

If there was one good piece of news to come from the report, it was provided by price movements during the month. Input and output prices rose, the latter for the first time since August, suggesting that disinflationary forces within the sector may be ebbing for the moment.

Despite subdued levels of activity, there was also a surprise improvement in perceptions toward operating conditions in the year ahead, rising to the highest level seen in seven months.

The slowdown in service sector activity, along with another steep decline in the manufacturing sector, left He Fan, chief economist at Caixin Insight Group, unimpressed.

“The Caixin Composite Output Index for February came in at 49.4, dipping below 50 again, indicating the economy is still weak and unstable,” he said.

He continued:

Overall, the services sector has outperformed manufacturing industries, reflecting continued improvement in the economic structure. While implementing measures to stabilize economic growth, the government needs to push forward reform on the supply side in the services sector to release its potential.

While the survey is small in nature, leading some analysts to dismiss the month-to-month movements, the weakness today mirrored that in the larger NBS nonmanufacturing PMI survey released earlier in the week.

That government survey, taking responses from firms in the public and private sectors, fell to 52.7, the lowest level on record.

Though both continue to suggest that activity levels across the sector continue to expand, the improvement is far from strong. That’s a concern, particularly as this sector is now the largest component of China’s economy, and an important piece in China’s economic rebalancing puzzle moving forward.

NOW WATCH: This incredible 580-ton monster machine is building bridges across China