The great hope for China's economic future is suddenly looking better

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The great hope for China’s economic future — the nation’s vast services sector — showed renewed signs of life in March.

The latest Caixin-Markit services purchasing manager’s index (PMI) rose to 52.2, up from 51.2 in March, indicating that activity levels accelerated at a faster pace last month.

A PMI measure changes in activity levels from one month to the next. Anything above 50 signals growth, while anything below that level means contraction — so the higher the number the better.

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The March improvement mirrored the separate non-manufacturing PMI report for March released by China’s National Bureau of Statistics earlier this week.

The difference between these two surveys is that the Caxin-Markit report is focused solely on small and medium-sized firms from China’s private sector. The NBS survey looks at firms of all sizes, from both the private and public sectors.

In a statement accompanying Wednesday’s release, Markit noted that “new orders rose modestly at service providers in March, with the rate of growth little-changed from the previous month. Some respondents commented that improving underlying market conditions had helped to secure new work”.

Though the new orders gauge grew modestly — indicating that activity levels may improve further in the months ahead — Markit noted that “fewer-than-expected sales at services companies underpinned a further decline in outstanding business across the sector”.

Employment growth also declined, marking the first contraction in staff numbers since August 2013.

“Services companies took a cautious approach to staff numbers,” said Markit. 

“This was highlighted in March by the first fall in service sector employment since August 2013, albeit only slight. 

“Companies that reported job shedding generally commented on the non-replacement of voluntary leavers and, in some cases, job cuts due to relatively muted growth in new work.”

Sentiment towards the operating outlook also deteriorated, slipping to its lowest level this year. Though still at a healthy level, optimism was built around expectations for an improvement in economic conditions rather than actual signs of increasing demand.

“Optimism was generally linked to forecasts of an improving economic climate and planned company expansions,” said Markit.

Though a solid report, particularly following a sharp slowdown in the decline registered in the nation’s manufacturing sector over the same period, it’s still far too early to declare that a solid upswing in activity has begun. 

While the report is seasonally adjusted, the timing of the week-long Lunar New Year holiday in early February may have also played a role in the sudden acceleration in activity levels, likely ensuring caution will prevail until the next set of PMI reports are released in early May.

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