Rapid expansion for services sector in May

Business activity and new work in the services sector are rising at the quickest rate since late 2010, according to the latest Caixin PMI data, signaling the first increase in Chinese services activity for four months in May amid an easing of measures related to COVID-19. 

The seasonally adjusted headline Caixin China General Services PMI jumped to 55.0 from 44.4 in April, the first increase in services activity since January. The rate of expansion was also the steepest recorded since October 2010.

A reading above 50 indicates expansion, a reading below reflects contraction.

Companies said an easing of restrictions related to the pandemic had driven the renewed expansion in activity, according to Caixin.

However, the pandemic continued to have a detrimental impact on new export work, which fell sharply.

The resumption of business operations and an improvement in client demand reportedly led to the first upturn in total new orders since January. The rate of expansion was the sharpest since September 2010 and faster than the historical average. 

Data indicated that the increase was largely supported by firmer domestic demand, as new export business continued to fall markedly in May. Firms frequently said external demand was weak amid the ongoing pandemic and subsequent public health measures, according to the report.

Backlogs of work fell for the third month in a row, in part driven by the resumption of normal business operations at many firms. Efforts to improve efficiency led to a further fall in staff numbers. Confidence regarding the year ahead remained strong overall, despite weakening since April.

Average input prices were broadly unchanged for the second month running in May. While some firms reported that the resumption of more normal business operations had raised costs, others mentioned increased efforts to reduce expenses. Meanwhile, prices charged by services companies continued to fall amid efforts to stimulate sales, the report said.

"Demand for services recovered more strongly than that for manufacturing, which was more constrained by sluggish exports amid the ongoing impact of the pandemic’s spread outside China," said Wang Zhe, senior economist at Caixin Insight Group. 

"In general, the improvement in supply and demand was still not able to fully offset the fallout from the pandemic, and more time is needed for the economy to get back to normal," Wang said.

"The composite employment gauge stayed in negative territory as companies were cautious about increasing headcounts. But they were relatively optimistic about the economy’s forward momentum, and look forward to implementation of the policies announced during the annual session of China’s top legislature."

The Caixin China General Services PMI is compiled by IHS Markit from responses to questionnaires sent to a panel of around 400 service sector companies.