Economic Buzz: China services activity growth accelerates in May, overall business conditions soften marginally

China's service sector expanded at a faster pace midway through the second quarter. Services companies signaled stronger increases in both new business and activity during May.

This was despite a renewed fall in new export orders. As a result, companies hired additional staff to cope with higher workloads, leading to a slower rise in the level of outstanding business.

Turning to prices, cost inflation quickened in May, but firms opted to cut their selling prices, despite stronger optimism regarding future activity.

The headline Caixin China General Services Business Activity Index posted 51.1 in May, up from 50.7 in April. This marked the twenty ninth successive month in which the index has registered above the crucial 50.0 no-change mark to indicate an expansion of services activity in China.

The pace of services activity growth accelerated since April but remained modest overall.

The Composite Output Index posted below the 50.0 no-change threshold at 49.6 in May, down from 51.1 in April. This marked the first reduction in output since December 2022.

Underlying data indicated that faster services activity growth in May had failed to offset a drop in manufacturing production. A renewed reduction in composite new orders underpinned the fresh fall in activity.

Employment also declined slightly, driven by job shedding across the goods-producing sector. At the same time, backlogs of work were depleted for the first time since January.

However, overall business confidence improved, supported by rising optimism across both sectors. Turning to prices, average charges continued to fall in May, declining at the quickest pace in just over two years as input cost inflation eased.

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