Things have been tough in China for months, but people bullish on the Chinese economy still often point to one part of it: the services sector.
The problem with that, though, is that the services sector too is showing signs of deterioration.
On Thursday, the September Caixin services PMI came in at 50.5, down from 51.5 in August. Anything below 50 suggests a contraction.
The official government services PMI held steady at 53.4 from August to September.
In other words, it doesn’t look as if the services sector is growing, no matter how you slice it.
That’s important, because some China bulls have been saying a growing services sector is what will get China out of its economic slump.
Last month, China’s Beige Book – which is released not by the government but by a private New York-based firm – argued that recent perceptions of a Chinese slowdown were “thoroughly divorced from facts on the ground.”
It conceded that the manufacturing sector – which posted a 49.8 PMI reading in September, up slightly from August’s 49.7 number – was contracting. But it also said manufacturing was no longer the force of the Chinese economy.
Instead, it said, investors should look at the country’s growing services sector. China bulls know the country’s traditional growth drivers – like property development – have languished.
They just argue that that’s OK because the services sector will pick up the slack.
This month’s PMI read of the services sector, however, casts more doubt on the argument that it is growing fast enough to carry China’s transitioning economy as it moves from one based on investment to one based on consumption.
“The story of strong services offsetting weak manufacturing looks increasingly unlikely to have a happy ending,” Bloomberg economist Tom Orlik wrote in a note out after the data release.
Expect the government to continue enacting measures to stimulate the economy – more rate cuts, more loosening of housing policy – to breathe life into the real-estate market.