China's service sector has seen significant growth as new business inflows have propelled activity to its fastest pace in seven months. The seasonally adjusted Caixin services purchasing managers index (PMI) recorded a notable 52.2 in December, up from 51.5 in November, indicating a robust recovery above the pivotal 50 marker that distinguishes expansion from contraction.
This development marks an extension of the growth period to two years, with the acceleration of business activity reaching levels not seen since May. New business inflows have not only spurred growth but also led to increasing backlogs within the services sector. The cautious approach adopted by service managers regarding payrolls has been a contributing factor to this phenomenon.
The faster growth of new business has resulted in a compounding backlog of work as service firms have opted to reduce employment levels amid a decline in overall business optimism. Concerns have surfaced among businesses regarding intensifying competition and a pessimistic outlook on international trade prospects.
While domestic demand for services in China has been positive, there have been setbacks in demand from overseas buyers. Nonetheless, promotional efforts and a stronger underlying demand have been instrumental in supporting the increase in new sales. Sales growth has predominantly stemmed from domestic demand, with new export business experiencing its first decline since August 2023 due to diminishing foreign interest. Additionally, the service sector has encountered some price inflation during December.
Input costs have risen moderately, driven by increased prices for raw materials and elevated salaries. In response, service providers have slightly raised the prices they charge, driven by improved demand, thus pushing the price indicator back into positive territory. The Caixin services PMI is a composite index compiled by surveying 650 private and state-owned services companies, offering valuable insights into the health of the sector.
The composite PMI, which merges the performance metrics of both manufacturing and services sectors in China, registered at 51.4 in December, a decline from November's 52.3. Despite this drop, December's figures signify a continuous expansion period for the composite PMI that has now lasted for 14 months, highlighting resilience in the broader economic framework..