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Overseas sales support China's robust services sector

Overseas sales support China's robust services sector

China's services sector remains robust and expanded at a solid pace in January according to a new private survey released on Sunday.

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By Jay Banerjee 04.02.2019

China’s services sector remains robust and expanded at a solid pace in January according to a new private survey released on Sunday.

The Caixin/Markit services purchasing managers’ index (PMI) for last month came in at 53.6, which was down on the 53.9 score from December. While growth did moderate slightly, the latest reading is still a cut above the 50.0 threshold that separates expansion from contraction.

The sprawling sector was supported by an increase in overseas sales in December after export business soared at the fastest pace since late 2017 following a business-centric drive to attract more clients from overseas. Overall new orders also climbed from an already healthy 52.3 in November to 52.6 for the final month of the calendar year.

The strong figures for services will come as a timely boost to the government after the recent slowdown in manufacturing. Services currently account for more than 50% of China’s gross domestic product and will  play a crucial role in weathering growing economic headwinds and stuttering industries.

Economist Nie Wen warned last week that the small rebound for manufacturing for January “will be a short lived one” as the ongoing trade conflict with the United States, long term restructuring and a low emissions drive will continue to weigh heavily on factories. While services have also been pressured in recent months, it does appear capable of supporting the world’s second largest economy for the time being.

“Overall, China’s economic growth was weighed on by weakening domestic demand in January, although exports improved marginally as the Sino-U.S. trade negotiations flagged signs of progress,” CEBM Group director of macroeconomic analysis, Zhong Zhengsheng said.

Zhong said the short to medium term prospects for the Chinese economy are dependent on the government’s ability to boost domestic demand and bring about a peaceful resolution to trade disputes. However, he cautioned that an immediate return to economic growth is unlikely for now.

Zhong added: “Given that the government has refrained from taking policies of strong stimulus, the downward trend of the economy may be hard to turn around for the time being.”

The upbeat assessment in the latest Caixin readings for services mirrored those in an official survey published late last week. However, it is a different story for the manufacturing PMI, which slumped to its lowest level in almost three years on Friday. Caixin’s composite manufacturing and services PMI also cooled to 50.9 for January.

China’s services sector is countering weaknesses elsewhere for now though and Caixin’s latest survey highlighted its strength after enterprises in the sector added to their payrolls last month, while inflation eased, and costs of operation and output charges also grew at a steadier pace.

China is not the only country experiencing a drop off in factory activity though as PMI readings for countries across Asia have also fallen. Taiwan and South Korea recent logged the weakest readings since late 2015 and 2016, respectively, while Japan’s activity slumped to its lowest level in 29 months.

The slowdown has reinforced analysts’ expectations that central banks in the region will stand pat and not introduce any further interest hikes in 2019. There is even speculation that countries such as China and Australia may opt for rate cuts. ANZ Asia strategist, Irene Chung again pointed to the
US-China trade war as the pivotal factor

She said:  "The slowing down of the manufacturing sector in Asia continues. A lot depends on whether the US and China come to a reasonable deal. Then we can actually avert this potential trade recession. But at the moment, it's all tentative.”

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