China's services sector expands in July, but external demand slows: Caixin PMI

China services PMI: China's services sector saw accelerated growth in July, driven by an increase in new orders, according to the latest Caixin/S&P Global services purchasing managers' index (PMI) released on Monday. The PMI rose to 52.1 from 51.2 in June, marking the 19th consecutive month of expansion. A PMI reading above 50 indicates growth, while below 50 suggests contraction.

The Caixin/S&P Global services PMI predominantly reflects the performance of private and export-oriented companies. Despite the growth, the index showed that overseas demand slowed to its weakest pace in 11 months, highlighting ongoing challenges in China's economy.

In contrast, the official services PMI indicated a stagnation in the sector, with declines noted in retail sales, capital market services, and real estate service industries. This divergence underscores the complex economic environment China is navigating, as the world's second-largest economy grew more slowly than expected in the second quarter. The nation also faces deflationary pressures and a prolonged property slump, with retail sales growth in June hitting its lowest rate since early 2023.

The Caixin/S&P survey reported an increase in the new orders sub-index to 53.3 in July from 52.1 in June, signalling robust domestic demand. However, the overseas demand gauge revealed the smallest expansion since August 2023. Service providers faced rising costs for raw materials, wages, and freight, but employment levels grew at the fastest rate in 11 months, suggesting resilience in the labour market.

The Caixin/S&P's composite PMI, which includes both the services and manufacturing sectors, also remained in expansionary territory, though it eased slightly from June's figures. Senior economist Wang Zhe of Caixin Insight Group noted that weak prices, particularly in sales, continue to pressure company profits.

In response to these economic conditions, China's leaders have signalled a shift in fiscal policy focus towards boosting consumption, aiming to enhance incomes and social welfare. This approach is seen as a necessary adjustment from the country's traditional investment-heavy economic model. However, economists at Citi caution that without more aggressive and comprehensive easing measures, confidence may remain subdued. They also suggest that significant domestic stimulus measures may only become viable next year, as external economic challenges potentially intensify.

(With Reuters inputs)