China’s service sector experienced a robust boost in October, marking its fastest growth in three months. This upswing aligns with the Chinese government’s expansive stimulus measures aimed at stabilizing the country’s economic trajectory. A private-sector survey released Tuesday, conducted by Caixin/S&P Global, highlighted the service sector’s performance, reporting a rise in the purchasing managers’ index (PMI) from 50.3 in September to 52.0 in October. A PMI above 50 indicates growth, whereas figures below that threshold suggest contraction.
The service sector’s recovery parallels China’s official PMI results, which showed non-manufacturing sectors such as services and construction rebounding into expansion. This resurgence offers a glimmer of hope as Beijing races to reach its annual economic growth target, despite a sluggish third-quarter performance and continued instability in the property market.
This article examines China’s latest PMI data, Beijing’s aggressive economic policies, and the challenges ahead in reaching sustainable economic growth.
In October, China’s service sector displayed signs of strength after a period of stagnation. The Caixin/S&P Global services PMI—a reliable indicator of business activity—registered at 52.0, up from 50.3 in September. This growth underscores initial successes of Beijing’s recent economic interventions, with momentum gaining particularly in services, even as the country grapples with other economic hurdles.
China’s services sector is vital to the nation’s broader economic health, contributing nearly 54% to its GDP. A thriving services sector often signals healthy domestic demand, a necessary counterbalance to weaker exports. The October PMI figures thus bolster confidence in China’s ability to steer the economy through turbulent times. Wang Zhe, a senior economist at Caixin Insight Group, pointed out that the service sector’s growth aligns with the government’s recovery strategy, which focuses on boosting domestic demand and enhancing consumer confidence.
The renewed optimism in the services sector follows Beijing’s series of monetary stimulus measures, introduced in September to combat economic deceleration. To bolster the slowing economy, Beijing implemented policies aimed at increasing liquidity, supporting the real estate sector, and encouraging consumer spending.
The Politburo, China’s top decision-making body, vowed in a recent meeting to implement “necessary spending” to stimulate growth. These measures include increased government spending on infrastructure, lowered interest rates, and eased credit conditions, particularly within the property sector. These aggressive tactics are designed to offset the economic strain resulting from declining exports and weaker-than-expected domestic demand.
However, economists caution that China’s recovery is still fragile, particularly in light of persistent challenges within the real estate sector, which constitutes a significant portion of the economy. Without stable growth in property sales and construction, China’s economic recovery could face headwinds even with support from other sectors.
The October survey revealed a modest increase in new business, with the index rising to 52.1 from 51.0 in September. This uptick points to growing demand, albeit at a slower pace compared to earlier in the year. Notably, new business inflows from abroad have softened, suggesting that China’s international competitiveness remains a challenge amid global economic uncertainties.
Meanwhile, backlogs of work expanded as demand picked up, placing additional pressure on service providers. This increase in workload led to higher employment levels, marking the second consecutive month of job growth in the sector. The improvement in job creation is a positive sign for household income, potentially bolstering consumer spending.
Still, economists emphasize the need for sustained policy support to boost disposable income, particularly as households remain cautious about spending. As Wang Zhe from Caixin Insight Group noted, “Achieving China’s 2024 growth target will depend on a sustained recovery in consumer demand. That means policy efforts should focus on increasing household disposable income.”
Despite the expansion, service providers are facing increased operational costs, particularly for materials and energy. While input price growth slowed to a three-month low, these expenses remain a concern. Rising costs can strain profit margins, particularly for small- to medium-sized enterprises (SMEs) that form the backbone of China’s service sector.
To mitigate these pressures, some companies have increased promotional efforts, hoping to boost sales and maintain profit margins in a competitive environment. This strategy has, in turn, contributed to a rise in overall business confidence, with firms expressing greater optimism about future prospects. October’s survey noted the highest level of business confidence in five months, fueled by expectations of stronger demand and more favorable economic conditions in the months ahead.
The Caixin/S&P Global Composite PMI, which encompasses both manufacturing and services, climbed to 51.9 in October from 50.3 in September. This composite index highlights a general improvement in China’s business climate, buoyed by recovery in both services and manufacturing. While the manufacturing sector has also shown signs of stabilization, it remains constrained by weaker global demand for Chinese exports and supply chain disruptions.
The recent composite PMI figures underscore a delicate but promising recovery. However, analysts warn that further improvements in manufacturing and export activities are essential to achieving a balanced and resilient economic rebound.
China’s property market crisis remains a major impediment to economic stability. The real estate sector, which is both a direct and indirect driver of a significant portion of the Chinese economy, continues to exhibit signs of distress. Developers face high debt levels, and property sales have yet to show a sustained recovery despite government support measures.
The ripple effect of this sector’s struggles has impacted not only construction but also consumer confidence. Property remains a key investment for many Chinese households, and persistent uncertainty in this sector has dampened spending. The central government is grappling with a balancing act: managing debt and promoting growth while addressing structural challenges within the property market.
